Recession Probability? Only 1 Out of 17 Chance
"U.S. employment unexpectedly tumbled last month for the first time in more than four years, fueling worries that the U.S. economy which already limped into 2008 might soften further or even slip into recession in coming months."
Most reports on today's employment report were pretty negative, like the WSJ story above. But wait a minute, don't forget the recent study by labor economist Tim Kane (discussed on CD a few days ago), which finds:
"Among popular monthly labor measures, the unemployment rate is the most useful as an indicator of recession, whereas two top measures of employment growth –payroll jobs and civilian employment –have little value. The best pre-recession employment indicator is actually weekly claims for unemployment insurance (UI)."
According to economist Tim Kane, in an email to Greg Mankiw:
"The Recession Probability Index is a combination of the two most valuable employment indicators of a recession's early stages: weekly initial unemployment insurance (UI) claims and the unemployment rate. In this morning's BLS Employment Situation report for Jan 2008, the unemployment rate is 4.9%. The 4-week moving average of initial UI claims is 325,750, or 17,000 lower than 4 weeks ago and essentially unchanged from the October average. Therefore the new employment-based recession probability index (RPI) is 6.0%."
Note: In December 2007, there was a 35.5% chance that the U.S. economy was in recession according to Kane's model, so the drop to only 6% now is significant (see chart above, red line has been added to update the chart, click to enlarge).