Should we continue to consider the weekly jobless claims data as one of the more “reliable” leading indicators of the US business cycle? If the answer is “yes” — as it should be — then yesterday’s update continues to offer an encouraging outlook for the economy. Although new filings for unemployment benefits ticked up by 2,000 in the first week of June to a seasonally adjusted 279,000, that’s close to a 15-year low. In other words, the implied forecast remains upbeat for the labor market and, by extension, the US macro profile.
There’s no reason to restrict business-cycle analysis to one indicator, of course. In fact, that’s a dangerous proposition, which is why The Capital Spectator routinely crunches the numbers on a spectrum of economic and financial predictors — individually and collectively. But the numbers arrive one at a time and so it’s useful to review the updates from multiple perspectives. For now, let’s consider how the signal via claims stacks up with the historical record on NBER recession dates by way of a probit model that quantifies the probability of recession risk. Not surprisingly, this risk is low at the moment — less than one percent. Actually, it’s been low for several years, according to the trend in claims. (Note: claims are aggregated into a monthly data set and transformed to year-over-year percentage changes for this analysis. Why? The adjustment minimizes the high level of noise that infects these numbers in the short run.)
Meanwhile, the Atlanta Fed’s GDPNow model is currently projecting second-quarter GDP growth of 1.9% (as of June 11). That’s still a relatively sluggish pace, but the recent revisions for Q2 have been consistently rising by this framework and the current forecast compares favorably against Q1’s 0.7% decline. In a word, progress.
The final number for Q2 is still a bit of a guessing game; much depends on how the releases for June and July compare. Meantime, it’s clear that there’s a bit of a rebound underway in the second quarter — note yesterday’s solid gain in retail sales for May, for instance. There’s still plenty of room to debate the degree of the revival and whether we’ll return to the stronger pace that was bubbling in late-2014. For now, the latest numbers still point to improvement after a disappointing Q1.
The recession forecasts of recent vintage have, once again, proven to be false alarms. What went wrong? The usual factors, including cherry-picking indicators and substituting the headlines du jour for objective macro analysis based on a robust review of the numbers. It’s an old habit, but forever new. When the next economic report delivers bad news, rest assured that the rush to judgement in some corners will kick in anew.
Yes, there’s probably another recession coming. But unless your crystal ball is spectacularly reliable, mere mortals are still limited to analyzing the big picture based on a flawed resource, albeit the only one available: the published numbers to date.