“Green Shoots” From Unemployment Report

Robert Gordon, an economist at Northwestern University and a member of the NBER, which defines and dates our recessions for us, has written a fascinating article on VoxEU.com: “Green Shoot or Dead Twig: Can Unemployment Claims Predict the End of the American Recession?” which claims to be able to predict the bottom of the recession. I reproduce the most important chart in the essay here.

I have broken up the chart into two charts for readability. The upper chart has data on initial claims for unemployment insurance.

This chart looks at continuing claims for unemployment. Continuing claims doesn’t have any predictive power. It is a lagging indicator. On the other hand initial claims, once it peaks, predicts the bottom of the recession in the next six weeks or so.

He uses the seasonally adjusted numbers, I checked the data at the Labor Department and also added the last few weeks on. We are now 4 – 5% below the peak in initial claims. When Gordon wrote the article we were 3% below the peak.  Also, all the numbers for unemployment are a four week moving average of the weekly numbers.

Looking at the ratio of initial claims to total employment, the last column on the first table, this recession is in line with the last two and less severe than the first three.

Looking at the last column on the second chart, continuing claims, this recession looks like the first three. It is harder for the unemployed to find new work.

He also discusses false peaks or false signals in the data.  Well worth reading.

The market bottoms out before the recession bottoms by, on average, four months.  So if, in fact, the peak in initial claims is signaling the bottom of the recession was one or two weeks ago, then the March bottom in the SP500 was the market bottom.

Happy days!