Note: This commentary has been updated to include this morning's release of Nonfarm Employment for April.
Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
- Nonfarm Employment
- Industrial Production
- Real Retail Sales
- Real Personal Income (excluding Transfer Receipts)
The Latest Indicator Data
This commentary has been updated to include Nonfarm Employment for April. As the adjacent thumbnail of the past year illustrates, Nonfarm Employment remains in its upward trend. However, the April report of 160K new jobs was substantially below expectations (Investing.com was looking for 202K). Furthermore, the February and March numbers were revised downward by 19K (12K and 7K, respectively).
The chart below shows the monthly percent change in this indicator since the turn of the century, a period that includes two recessions.
The Problem of Revisions
At first glance, this indicator appears to have a strong correlation with the business cycle. However, there is a major problem with this assumption: The data in this survey of business establishments undergoes multiple revisions. The initial monthly estimate is subject to a first and second revision, subsequent benchmark revisions and annual revisions that stretch back many years (the most recent includes revisions back as far as February 1990). The cumulative size of the revisions is quite stunning, much of which is owing to the "hindsight" of those annual revisions.
The chart below measures the size of the revisions from the initial estimate to the latest employment report.
The downward revisions are absolutely astonishing.
The Problem of Population Growth
Another problem with the Nonfarm Employment data is that it isn't adjusted for population growth, which reduces its usefulness in illustrating secular trends. The chart below incorporates a population adjustment by dividing the Nonfarm Employment (FRED series PAYEMS) by the Civilian Labor Force Age 16 and Over (FRED series CLF16OV). We've added a couple of trend lines and a callout — not to suggest a forecast but rather to highlight the potential impact of a near-term business-cycle downturn. Note also that the current level is about where we were at the end of 1997. The interim peak was in November of 2015.
The Generic Big Four
The chart and table below illustrate the performance of the generic Big Four with an overlay of a simple average of the four since the end of the Great Recession. The data points show the cumulative percent change from a zero starting point for June 2009.
Current Assessment and Outlook
The US economy has been slow in recovering from the Great Recession, and the overall picture has been a mixed bag for well over a year and counting. Employment and Income have been relatively strong. Real Retail Sales have essentially gone nowhere for the past ten months, and Industrial Production has essentially been in a recession.
See Economist: US Won't Tip Into Recession Until 2019 (If the Fed Doesn't Mess Things Up)
The chart below illustrates the average of the Big Four percent is off its all-time high. The post-recession recovery peaked in November 2014, eighteen months ago. It is perhaps worth bearing in mind that the NBER's most recent statement on US recession status (that we are not in a recession) is August 2014, three months before the current recovery peak.
The next update of the Big Four will be the Mid-May release of the April numbers for Industrial Production and Real Retail Sales.
