Adding the job vacancy rate to the McKelvey (Claudia Sahm) recession signal eliminates false negatives and false positives, and provides a much faster signal than Sahm. 
This idea was one of the things Adam Taggart and I discussed last week on Thoughtful Money, posted today.
Credit for the indicator goes to McKelvey for the original idea, and importantly to Pascal Michaillat and Emmanuel Saez for the second signal.
I will refer to the pair and the improvement as PMES, their initials.
Also, and I cannot emphasize this enough, credit goes to Regis Barnichon for the data and idea used by PMES and me in the charts below.
Has the Recession Started?
Please consider Has the Recession Started? by PMES, August 11, 2024.
To answer the question, this note develops a new Sahm (2019)-type recession indicator that combines vacancy and unemployment data. The indicator is the minimum of the Sahm indicator—the difference between the 3-month trailing average of the unemployment rate and its minimum over the past 12 months—and a similar indicator constructed with the vacancy rate—the difference between the 3-month trailing average of the vacancy rate and its maximum over the past 12 months.
Vacancy Rate
The vacancy rate is defined as the ratio of job openings to the labor force. The BLS Job Openings and Labor Turnover (JOLTS) report only dates to December of 2000.
However, Regis Barnichon, in 2010 described Building a composite Help-Wanted Index
This paper builds a measure of vacancy posting over 1951–2009 that captures the behavior of total—print and online— help-wanted advertising, and can be used for time series analysis of the US labor market.
Barnichon says HWI and JOLTS “closely track each other. In particular, the composite HWI does a good job of matching the level of JOLTS job openings over 2000–2009, indicating that the MISM can successfully model the share of online advertising.“
It is that overlap period that validates the second indicator.
Returning to PMES…
In the aftermath of the pandemic, the vacancy indicator started rising in 2022 and peaked in 2023, so it would have delivered a a prediction that was so early as to be misleading. This might be due to the extreme outward shift of the Beveridge curve during the pandemic (Michaillat and Saez 2024).
This shift lead to elevated values of the vacancy rate during that period, and therefore elevated values of the vacancy indicator. But the main advantage of the vacancy indicator is that it does not present the same uninformative blips as the unemployment indicator. For instance, there is no problematic blip in June 2003 (the vacancy indicator is not 0 but it is much lower than the unemployment indicator). Of course, it presents other uninformative blips. For instance it had a peak in July 1967 while there was no recessions then.
Minimum Indicator
To decide whether or not there is a recession, PMES takes the minimum of either McKelvey or Job Openings.
If either one is below 0.3 percent, there is no recession.
Sahm Discrepancy
The Sahm rule is that a recession has started when the unemployment indicator reaches 0.5pp. We saw that the rule works perfectly for 1960–2023. But the rule breaks down just before 1960 because in 1959 the unemployment indicator reached 0.6pp but there was no recession. This issue is easily fixed, however, by raising the threshold used in the rule to 0.6pp. This would make the rule a little slower at detecting recession starts, but it would allow the rule to continue working [from now] until World War 2.
For some reason, the Sahm indicator provided by the St. Louis Fed is sometimes negative. This is strange given that—by definition—a variable cannot be lower than its minimum over the past 12 months. Our indicators are never negative.
The reason for the Sahm negative discrepancy is Sahm does not include the current month in the 12-month lookback period.
A Sahm chart is rife with negative numbers. This never made any sense to me either, but that is why.
I doubt, but cannot prove, that McKelvey had a lookback period that did not include the current month, thus generating a mass of negative numbers.
I use the PMES methodology for the charts in this post and from now on.
Note that Sahm started her indicator in 1960 to avoid a false positive. Also, she takes a one-digit input and then creates a two digit output.
Finally, Sahm claims to have invented the rule. However, credit should go to Edward McKelvey, at Goldman Sachs.
PMES rounds to a single digit. I compute the unemployment rate directly, so I can compute to three digits and round to either one or two.
With that backdrop, here are the charts I created.
McKelvey Recession Indicator
Constructed accurately, there are no negative numbers. Sahm has at least one false positive and a second that would occur if rounded up.
McKelvey proposed using 0.3 as a trigger and that generates at least two more false positives.
I believe the October 2023 trigger is false. It barely skirted 0.3 then collapsed for a few months.
My preferred trigger is 0.4, halfway between McKelvey and Sahm. This trigger has two false positives, straight up.
My next two charts use data generously provided by Regis Barnichon.
Job Openings PMES Recession Indicator
The PMES indicator has two false positives but they do not overlap with the McKelvey false positives as the following chart shows.
McKelvey-PMES Combined Recession Indicator
The above chart plots the minimum of McKelvey or PMES from 1953 until now.
Over the last 11 recessions, there are no false positives or negatives on the McKelvey-PMES Combined Recession Indicator, except perhaps the current readings.
I prefer a trigger of 0.4 rounded to two decimal places or perhaps 0.5 rounded to two decimal places.
The 0.3 that triggered in October of 2023 did not stick and appears bogus no matter how much the NBER revises things.
Recession Lead Time In Months Combined McKelvey-PMES
These are very impressive numbers vs Sahm at 0.50 which has at least one false positive and lag times as great at 7 months.
Combining the triggers eliminates the false positives and negatives and allows the use of a lower trigger (0.30 or 0.40 instead of 0.50 or 0.60) straight up.
Michaillat and Saez note “The minimum [combined] indicator is always faster than the unemployment indicator, except in 2008 when it called the Great Recession 3 months later than the unemployment indicator. The slight delay is because job vacancies took some time to drop at the onset of the Great Recession.”
Depending on upper and lower bounds, Michaillat and Saez compute the current odds of recession at either 40 percent or 67 percent.
I note that since 1953, every time the economy was in the current state, the economy was in recession.
That does not make the odds 100 percent because everything is up to the NBER, the official arbiter of recessions.
A Dramatic Two-Day Change in GDPNow Forecast
On August 17, I noted A Dramatic Two-Day Change in GDPNow Forecast, Here Are the Details
A slew of economic reports on Thursday plus a residential construction disaster on Friday caused a huge decline in the GDPNow estimate.
Recession Underway
July 25, 2024: “All Hell Breaks Loose” In the Next Few Months as Recession Bites
August 2: Unemployment Rate Jumps, Jobs Rise Only 114,000 with More Negative Revisions
August 2: 2024: The McKelvey (Sahm) Unemployment Rate Recession Rule Just Triggered
August 15, 2024: Industrial Production Declines 0.6 Percent on Top of Big Negative Revisions
It seems to me that all hell breaking loose.
Mish, I’m having a brain fart figuring out how the rising vacancy rate is bad not good. Someone help a dummy out as I’m obviously missing something in the definition of job vacancy rate. Seems like that line is inverted (more job openings to workers = good).
Mish, saw you discussing this with Adam Taggart, nice work.
There is a fundamental reason why now “is different” from all other times for which such indicators have been applied: household cash in the bank from Federal stimulus funds: https://fred.stlouisfed.org/series/BOGZ1FL193020005Q trillions of excess spendable cash with unpredictable results; and many times real GDP growth of 2% or about $500B. A recession can only be caused by a negative impairment of the asset base whose growth determines real GDP growth: labor, capital (stock and bond markets), real estate value, trade (and sometimes the price of a key commodity like oil decades ago which displaces spending elsewhere) – a growth impairment of any one or more of these must be large enough to offset normal real GDP growth – so far, none evident.
the money has all been spent and then some. We can see that is surging delinquencies
the money is there now
Wages and productivity. Millennials and gen Z are much more sophisticated than
boomers. Most boomers cannot order online in MickeyD. Old pilots cannot fly F-35. The dynamics of higher productivity and higher wages will lift all workers bc they will be much more productive and efficient than old workers. Gen alpha gets their knowledge from gen Z and millennials. Gen alpha (2010/2024) is about 60% smaller than gen Z, millennials and boomers.
Combining the info in the unemployment and vacancy rates sounds like an interesting lagging indicator of when expansions give way to contractions. But I still don’t see why this new indicator is definitive proof we are in a recession.
In every model of a complex system, there are always inherent assumptions as we seek to simplify.
We expect consistency from economic variables (think about that), as if the relationships among them are constant, compounding collinearity. In fact, we are dealing with interacting stochastic processes. They are subject to interference, external and internal, some random, some deliberate (some might say chaos).
Reducing to a single effective indicator might be possible; however, if we don’t understand the underlying relationships, the indicator is happenstance. It might still work. Then, again…
Looking at the charts, is there an ‘average’ period between the spikes? Maybe 10 years or so? In 1860, Juglar proposed an economic cycle of 7-11 years. See it here: https://en.wikipedia.org/wiki/Business_cycle
At the end of the day, the # of 18-wheelers on the road might be the best indicator of impending recession.
Are we in recession? Oh yeah. The question is, how bad?
The front end of the boomers approach eighty. In the next few years there will be a few of them. They will follow the silent gen homeownership : high 70% ownership and dwindling numbers. They will spend more and leave less to gen X and millennials. The healthcare system will benefit the most.
There bipolar unemployments : those above $60K/y and the $60K/y and below, which
are the majority. When the unemployment of the $60K(-) rises the cost of labor fall. Businesses, especially small businesses will be more profitable. In a good economy businesses might raise the threshold of the low skilled workers from $60K(-) to $70K(-), bc the $70K/y(+) will pull them up
Not really that static a situation.
Consumption which drives economy needs a way to pay for its’ desires.
Consumers are currently overextended with depleted savings and heavy credit card debt. This impacts those in your lower criteria earning under 60k the most.
They are the ones with least financial security as they are having trouble servicing credit card debt which has been used to purchase necessity items such as food and shelter.
As spending turns down it will be re-enforced by less job availability when Business gets forced to reduce scale of operations from lower product demand.
Fed even if it lowers will not be able to arrest the slowdown as stimulus results lag actions.
Fed still has to deal with slow progress of inflation coming down which hinders their ability to act forcefully.
This is what stagflation produces, anemic growth in an inflationary environment as defined by Feds 2% target which still is exceeded.
Fed can not fix things with monetary policy alone.
Too late for anything to come out of the dysfunctional Biden Harris administration. They are still talking about things as platforms which are meaningless to everyday people.
that’s the standard econ vortex.
And it is getting entered as the earlier link from Fast Eddy shows default rates are rising on credit cards.
Consumers will have a tough time turning around their credit scores if they have entered into defaults.
Once the turn happens it is not reversed so easily just by a few 25 basis point cuts.
Equity markets still cling to thinking this whole operation going to land softly on its feet. Data does not support that idea.
Just as there are an infinite number of arbitrary little tweaks which can,at any given time, be made to make the Phillips curve appear to “work” again; as soon as it; yet again; become obvious that the last such tweak no longer works anymore…….
More fundamentally: Neither “unemployment” nor “inflation” as in anything measurable by prices; nor “recession” have any significance at all. Instead, they’re ALL just made up, entirely arbitrary nothingburgers, forcefed into a; by now; pliant and capitive indoctrinati’s collective uncritical delusion.
“Recession,” nor “unemployment”, are no better nor worse; nor even categorically different; from “expansion” and “full employment.” All are just different, arbitrarily chosen, descriptions of phases of the perfectly naturally occurring business cycle.
Instead, it is attempting to meddle with, aka “manage”, this perfectly naturally occurring cycle of all economies; starting with the pure waste of scarce resources which is pretending one can meaningfully “measure” any of it; which is causing problems to begin with.
Payrolls benchmark, revised -818,000
Fed has a real problem with prior over reported job market and sticky inflation.
This is interesting, and the indicator may indeed be catching the leading edge of a recession. That said, it’s not clear yet if the trend will quickly reverse. In fact, if the Fed cuts in September, I believe the trend will immediately reverse due to animal spirits, and the “recession” will be averted. That is a mistake that will reignite inflation within eight months. The first cut needs to happen in November to allow a quick recession and a healthy recovery to play out. Avoiding the recession completely with a September cut is equivalent to a Fed put on (overextended) lifestyle choices, and it is a mistake. It’s as plain as day to anyone paying attention.
I agree. I do not believe the BLS is going to come back and revise down GDP for this quarter into negative territory. This quarter should finish somewhere in the 1-2%. As usual, every month of additional data helps, so the Aug reports that arrive before the FMOC will either put the nail in the coffin for a rate cut or seriously make the Fed reconsider cutting at all.
We’ll know more later today what Powell is thinking. I’m like you in that I’m very concerned the labor market / economy aren’t going to weaken into a recession, but we’ll see sluggish growth through most of CY Q1 2025 and then 1-2 rates cuts are going to cause housing to move strongly higher with sub 6% rates. If the Fed misreads this, we could be looking at sub 5.5% rates by next March which will be very buoyant for the housing market.
I think the potential $1.92T (~40%) in deficit spending this FY is screwing up everyone’s models.
Point by point, my thinking is aligned.
Not sure a rate cut can suddenly spur demand enough to matter.
A few extra homes sold won’t make much difference. A bigger difference will be in credit card rates but even there unless it adds meaningful extra money saved on payments it just won’t stimulate Joe six pack to spending that much more.
Future spending plans will go nuts, as it is the first cut in a series, and everyone knows it. Assets will explode higher in price, both financial and hard assets. The first cut will leave a mark, and it’s a big one. It will create huge inflation within a year. It is dirt simple to see it, and everyone is averting their eyes on purpose. Supercore inflation is still at 4.73%, but eh, close enough to 2%? Come on, people.
Another though: Maybe the economy was relying too much on cheap money and that is over now and people actually have to go back to work but don’t want to b/c they’ve been speculating in real estate and stocks. Seems like there is still plenty of speculation going on and people are making a living off it rather than going back to work. The economy is a hard thing to comprehend and explain and things are never what they seem except in times of great booms or great busts. We are in neither right now.
What if the ‘cheap money’ is still in the system, getting passed around? Maybe it didn’t go away when the spigot was turned off.
Lots of money is still sloshing around and will be for years to come.
But it’s moving upward in nature (poor to rich) as the poor spent theirs first giving to the lower middle class who gave to the middle class who are giving to the rich and will ultimately end up with the uber rich.
It’s like dropping a spoonful of sugar into a glass of water that already is saturated with sugar. The newly added sugar slowing makes its way to the bottom (uber rich).
Its clear the stimmy money allowed a LOT of people to suddenly ‘live it up’ in a way they never could before which drove demand (witness so many people buying cars during the pandemic).
The stimmy money is gone so lifestyles are going back down and this is dragging the economy which ramped up big time to accommodate stimmy spending.
I’ll wait until the CFNAI data for July comes out on August 22nd. I believe we are still at stall speed but not a recession. Unemployment can go up a bit but it doesn’t mean we are in recession. The sky is not falling yet in my area. I still see moderate restaurant traffic and traffic in general. I supposedly live in the sky is falling state of California but I’m just not seeing it. Unemployment has for sure risen but it doesn’t feel like the recessions of the past if it is one.
Same here in GA
I agree. My area in GA remains very strong. My property taxes shot up 25% this year. Insurance & property taxes for ~60% of homeowners are becoming a real issue.
Most recessions are ‘rolling;’ they move from region to region. The employment in each region (MSA) reflects the economic base of the region, and its connection to the ‘whole,’ the US, and the rest of the world, in some cases.
Economic base theory breaks out export and support industries. The more diversified the export industries, the more a region looks like the US as a whole.
What will be different this time around? Impact on low income,for one. If we don’t get riots of the have-nots, I’d be surprised. Also, a significant drop in stock prices will wreak havoc on the middle class retirement/wealth.
This makes a lot of sense especially if you look at the revised numbers on unemployment and realize it’s concentrated in a few sectors which are also highly concentrated in certain areas of the country. Those areas are surely hurting a lot more than others like say Washington DC which is buffered due to government jobs which are never lost.
The upper 10% that do the things you talk about are doing very well. Stocks and housing, so long as they are going up, are like ATMs for those that own them. But once they stop going up and heaven forbid might go down then the ATM effect shuts off. There is a lot of HELOC money floating around even as the 90% lose jobs and credit cards. But it will play out while the 10% try to maintain their standard of living juts like the 90% did with their free covid money. It happens gradually then all at once.
We are in a recession. I don’t need somebody with financial pomp and circumstance to say it. I can see it with my own eyes in wealthier and poorer areas. Will it get worse? Yep. I don’t see how it won’t. Money is not being bounced back into the economy. It’s bouncing everywhere but there.
Seeing as how the average person, has spent all the money that they had already, and then borrowed more, and more, and spent all of that money too, I would say “Yes” it will get a lot worse!
Most money available has been taken from people homes, and much of it spent already, just to keep up. The banks have lent about all they can to worthy borrowers, and not many are left, that wish to borrow anymore, and the rest are mostly no longer credit worthy. The last thing Banks want right now, is peoples RE! They would loose their shirts if that happens…
The economy has not been allowed to get out of debt, because we keep printing more $$$, which keeps us in more and more debt. This will not end well…
Out this away, all is well and status quo. It’s a DC suburb, so, you know…..
The boomers spend less in restaurants, but more on diagnostics, surgeries and
dentists, health and car insurance.
Here, I look at countless new cars and center-console boats, and you wouldn’t think there could ever be another 2008, except when you look around and see people living in their cars.
Credit card defaults set new record https://t.me/EdwardDowdReal/929
The new American Currency!!!
People are expecting some form of deflationary shock coming out of China to take some of the pressure off consumers.
Numbers out of Canada this morning for their RMPI (Raw Materials Price Index) were back on the plus side 0.7% for July (MoM) and 4.1% July (YoY)
Since this is basic to Industrial production costs it implies that underlying price increases will continue. Making it harder for people to make ends meet as there is sluggish move towards price stability.
Average Consumer must keep retrenching and with that will come less employment as producers scale back.
1. Energy consumption has expanded by 124% since 1980, but the efficiency with which each unit of energy is converted into economic value has deteriorated gradually, in line with depletion of non-energy natural resources.
2. ECoE – the Energy Cost of Energy – increased five-fold between 1980 (2.0%) and 2023 (10.2%).
3. Together, these factors indicate that growth in the “real” economy of material products and services since 1980 was only +89% – just fractionally ahead of growth in population numbers (+81%).
4. The World’s average person is now barely 4% more prosperous – and drastically more indebted – than he or she was back in 1980.
https://surplusenergyeconomics.wordpress.com/
Mish: have you had the opportunity to check out the “BOTS” article which appeared on the UnHerd site earlier this week
epic
BOTS: Brides of the State
Are you talking about this?
https://unherd.com/2024/08/the-march-of-kamalas-brides/
If so I will read it. If not, I need a link.
Thanks
Interesting stuff. Lots of work to gather and synthesize that data. I suck at charts so I’m always impressed by those who don’t.
I will say, I don’t think we need the NBERto tell us what we already know. And have known for some time.
Thanks
And you are correct. I spent about 30 hours on this post.
It took a lot of time to create charts similar to these:
https://pascalmichaillat.org/16.pdf
My intent was not to match them because I found them very confusing.
Separating the two ideas then creating a single combined chart instead of overlapping two charts makes it much easier to see.
I had a hard time constructing the new chart because I did not quite understand what the authors were saying.
Anyway, this was difficult for me. So thanks for appreciating.
Mish
Your hard work and efforts rarely go unnoticed, and that’s apparent by the engagement of your audience!
A tribute to You and Your hard work. I very much appreciate it as well, so “Thank You”
Amen
Actually, we do need them, BUT I would agree that our economy is EXTREMLY bifurcated. I do believe that the bottom 50% have been in a recession for closing in on 2 QTRs. Like everyone else though, the NBER needs to update their models to take into consideration the massive wealth disparity.