I was embarrassed to be among the last to admit the economy had fallen into recession in 2008. I was proud to be among the first to recognize the recession's end last May. But is it too early to do a victory lap on that? Could the economy be slipping back into recession? The way the stock market has stalled out, it's a question that we really have to ask ourselves whether we like the answer or not.
First of all, the end of the recession isn't yet "official." In a trivial sense, all that really means is that the National Bureau of Economic Research hasn't declared it over. But that doesn't mean it isn't over. The NBER has many times waited years to declare what, by that time, everybody knows.
In a deeper sense, there is no rigid definition for "recession," so the NBER's decision, whenever it comes, is subjective. Even more deeply, if we grant some kind of common-sense intuitive definition, once it is achieved and recognized there is no guarantee that a new recession won't already be underway.
To try to make it as objective as possible, I like the work of UCLA economist Edward Leamer, who has devised a very simple formula --using just three readily available economic statistics -- which has a nearly perfect track record of nailing the beginning and ends of recessions precisely as the NBER does. I'm not saying Leamer's model predicts the economy. I'm saying it recognizes when conditions have gotten to a point that, historically, has caused the NBER to "make it official."
Leamer's model looks at industrial production, payroll jobs, and the unemployment rate. Given where those three statistics are right now, his formula isn't quite ready to declare the recession over. It's close. It will probably happen next month, unless the jobs market sharply weakens. When the formula gives its signal, there's another formula for looking back and determining the timing of the turning point. It's looking that that formula will pick last May, the same as I did in real time.
I made my recession end call in May because of an entirely different set of statistics, designed to be predictive rather than merely to recognize what has already happened. What worries me is that these statistics have all started to get a little worse recently.
The one that gave the earliest indication of the end of recession was the number of claims for unemployment benefits. As I wrote here in May, when claims turn down after a long uptrend (that is, when fewer people file for unemployment benefits) that means the recession is only about a month or two from being over. That indicator has a perfect track record, as far back as the data goes.
The top in initial claims was in early April, and it's been steadily heading down ever since. Right now the 4-week moving average is 28% below its peak -- a very substantial move. The problem is that several weeks ago it was 33% lower -- which means it has risen more than 7% in a very short time. Over history, upticks like that have no predictive value. There have been many of them, and very few have led to recessions. Still, 7% is a big reversal. In
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