Friday, February 01, 2008

Recession Probability? Only 1 Out of 17 Chance

Payrolls Unexpectedly Decline, Increasing Odds of Recession:

"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).


At 2/01/2008 11:40 PM, Anonymous Anonymous said...

I recall the definition of a recession is defined as 2 quarters of negative growth. How is it that we have folks like Paul Krugman writing that we are already in recession?

No question there are some problems but it seems like the market has largely helped to sort out the credit crunch. Let's hope Washington doesn't screw it up. We can pretty much guarantee a recession if they start the usual meddling.

At 2/02/2008 8:41 AM, Anonymous Anonymous said...


Problem with payday loans is the interest rates. It's a bit like paying your bills with a credit card.

When one studies financial planning, one learns that discretionary spending is the area where most people can economize and the area that is least likely to be monitored. A most enlightening experience is visiting a bankrupcty forum.

Subprime products proliferated in places like California because the average person could not afford a medium priced home. Advising people to spend their money before they even earn it is to encourage poor financial management.

Why not try a budget and set a few goals or decide what you can live without? If every day expenses feel like emergencies, there is something wrong with this picture.

At 2/02/2008 10:19 AM, Anonymous Anonymous said...

Some choose to utilize differing definitions of recession. For example, "the time when business activity has reached its peak and starts to fall until the time when business activity bottoms out" is one that I found using a quick Google search. Of course, this definition results in there being more recessions than with the academic GDP definition. It also allows economists that choose to define a recession in this manner to be wrong much less in predicting recessions. Either Krugman is doing this, or he is predicting that the results for the current quarter that we are in and the following quarter will both be characterized by GDP contraction.

At 2/02/2008 4:32 PM, Blogger bobble said...

if you look at the University of Michign Consumer Sentiment Index, you'll see that the average guy on the street feels like we never came out of the 2001 recession.

At 2/02/2008 4:53 PM, Blogger Unknown said...

Yes recession is still defined by declining GDP. But I think it was Alan Greenspan who said that our economy is so advanced now that we could go between 2 business cycles without actually having a recession. It would be a slow down, but without all the characteristics of a recession.


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