A modified McKelvey recession indicator with no false positives or false negatives since 1953 suggests we are in recession now. 
100 percent of the time, with no false positives or negatives, under current conditions, the economy has been in recession.
What is the McKelvey Recession Indicator?
Take the current value of the 3-month unemployment rate average, subtract the 12-month low, and if the difference is 0.30 percentage point or more, then a recession has started.
Edward McKelvey, a senior economist at Goldman Sachs, created the indicator.
The problem with the indicator is that it has many false positives.
Claudi Sahm Revision
Claudi Samn, a former Fed economist, revised the rule, claiming it as her own, without credit to McKelvey, then set the indicator to 0.50.
Because that still had false positives, she started her series in 1960.
PMES Acronym
PMES is my acronym for Pascal Michaillat and Emmanuel Saez, economists at the University of California in Santa Cruz.
PMES is their initials. I am not sure that PMES is right but somehow I don’t think the name McKelvey-Michaillat-Saez will catch on.
It is brilliant work to add a second indicator that eliminates the false negatives and false positives.
I struggled with the idea of adding a second indicator for a long time before stumbling on their work.
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 in this post.
What Is the PMES Second Indicator?
The PMES recession indicator combines job vacancy rates with unemployment data. The indicator is the minimum of the McKelvey 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.
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.
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.
Pascal Michaillat notes “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.”
I explained that in my prior post on this subject.
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.
My charts, as do those of PMES, set the lookback period properly to eliminate negative numbers.
That touches all the background bases. Now let’s look at the two charts individually that comprise the lead chart.
Unemployment Rate vs Job Opening Rate
McKelvey Recession Indicator
The problem with McKelvey is five false positives, the last one being October 2023.
Claudia Sahm started her series in 1960 to avoid a huge false positive in 1959.
Job Openings PMES Recession Indicator
The PMES indicator, in isolation, also yields false positives. However, the false positives do not overlap with the false positives by PMES alone.
Here is the lead chart again for convenience (The minimum of McKelvey and PMES).
McKelvey-PMES Recession Signal
I propose a trigger of 0.40 or a write-off of the October 2023 value that barely touched 0.30 then did not exceed 0.30 for another six months.
McKelvey hit 0.34 in April, 0.35 in May, 0.40 in June (my preferred trigger), 0.49 in July, and 0.54 in August.
The rising consistency strengthens the signal.
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.”
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.
Pascal Michaillat Update
Pascal provides his update today: Has the Recession Started?
He says “With August 2024 data, our indicator is at 0.54 percentage points, so the probability that the US economy is now in recession is 48 percent. In fact, the recession may have started as early as April 2024.”
I calculate 0.54 independently, but will take the over line on 48 percent odds.
The signal is relatively high and rising consistently. Job revisions are hugely negative, and the Fed Beige Book shows flat to declining economic activity in 9 of 12 Fed districts.
Recent Economic Data
September 3: Construction Spending Growth Slows in May, Stops in June, Negative in July
September 5: Small Businesses Reducing Workers for the Last Four Months
September 5: Fed Beige Book Shows Flat or Declining Economy in 9 of 12 Fed Districts
Payroll Report: Manufacturing Sheds 24,000 Jobs, Government Adds 24,000, Big Negative Revisions
Earlier today I reported Payroll Report: Manufacturing Sheds 24,000 Jobs, Government Adds 24,000, Big Negative Revisions
Other than a small 0.1 percent improvement in the unemployment rate, this was a very poor jobs report with private payrolls only +74,000.
Following my jobs post, Lacy Hunt pinged me with this comment that he said I could share:
“Spot on! Also, I think that it is fair to exclude the birth/death adjustments which was a big number by my seasonal adjustment. Excellent report.”
Thanks Pascal and Lacy!
From here now on we’ll call it the Mish rule.
Mish has likely caught the leading edge of the recession with this, likely accurate, more advantageous new indicator. Now, we wait for the resurgence of inflation within 8 months of the (too early) resumption of the cutting cycle.
Merrick Garland and Juan Merchan are in sync with Trump until Nov 26. If Trump
sent to a state prison, not to a federal prison, he isn’t immuned, even if elected.
In 1963, in the UK, Profumo a defense minister in the conservative gov of PM MacMillan’s, was sacked after having sex with Mandy Davies and Christine Keeler.
Inflationary Depression
OR
Deflationary Depression
One of the above is imminent and in short order.
I believe the United States is beyond Recession talk at this point.
Are lower rates and $55 oil good or bad for the US and the global economy.
I’m betting against a deflationary depression, with the current extremely high levels of (illegal) population growth. Too much newly created money to be spent, whether by government expansion to accomodate the new workers, or the new workers themselves.
Anyone focusing on government reported data vs fundamental reasoning is doing themselves a disservice. Many of the economic “rules” are broken because they were not designed for many things happening right now that are not baked in. E.g. a step function of $10 trillion new “money”, immigrants that are not being counted, stock buybacks distorting metrics, non-bank lenders, overseas dollar based loans not authorized by the US, etc.
Good point as the economic models are not based on these extra unique conditions.
They need to adjust the models to account for what you stated.
$NDX in hell. PnF x1, 100 pt. Vol. Option #1 to July : 1,600 pts up. Option #2 to May 31 : 2,900 pts up. Support held, but if breached it can test Apr low, or prick Nov 2021 high.
When there was a middle class in the USA and a strong one, wealth was distributed more evenly. Unemployment cut into spending and hence negative GDP prints accompanied recessions.
The economy as it is structured today is a hollowed out middle class and wealth concentrated in few hands compared to 30 years ago plus. Those with wealth are still spending along with deficit government redistribution’s.
The bottom half of economy struggle to survive. What remains of middle class struggles to stay afloat. I realize that GDP is supposed to reflect what happens in the broad base, but as things are now, GDP reflects what the asset holders and Wealthy are doing not what is happening in large parts of the economic landscape.
Recession calls are thus a technical definition but do not reflect what is happening to better then 50% of the citizens.
This economy has what used to be referred to as a rising misery index. That is what will determine who ends up setting economic policy in 2025.
Catching Up: New Home Sales Increased to 739,000 Annual Rate in Julyhttps://calculatedrisk.substack.com/p/catching-up-new-home-sales-increased
“100 percent of the time, with no false positives or negatives, under current conditions, the economy has been in recession.”
There’s a first time for everything. When was the last time we had $2T, 40% more than we bring in, of deficit spending? Or, when was the last time unemployment fell in the middle of a recession?
There’s a reason why GDP and other recession indicating factors still remain above water. 2T of them in fact.
Thank you for continuing to point out the thievery of Claudi Samn.
0.3 and 0.5 are arbitrary trigger points. A few more rules can be added to improve the McKelvey approach to predicting a recession. The following is how to create a hysteresis:
1.) Start below 0.1
2.) if the reading rises above 0.3, there is a good chance a recession is on the way. Invest as if a recession is coming
3.) A reading above 0.9 confirms the recession.
4.) if a reading then declines to 0.1 and 0.3, and then rises above 0.3, ignore the indicator because the algorithm has not reset with a reading below 0.1.
It the Masses vote their Pocket Book . . . Trump should be a shoe in but the Dems are trying to steal the shoes . . .
The system is going to make sure Trump loses, and that known outcome doesn’t have anything to with how Mr. or Mrs. Joe Average feels about their pocketbooks.
Brandon, Pelosi and many others are on record saying that Trump can’t be allowed to win again.
Impressive to get a shout out from Lacy Hunt, my favorite economist of all time.
Lacy and I talk regularly
Also getting shout outs from Albert Edwards
https://x.com/albertedwards99/status/1831926520094585059
Mine as well and I really enjoy Mish’s Work here!
Your guy Nate Silver’s Prez model has flipped strongly Trump. Merchan just delayed sentencing and “if it doesn’t get thrown out first.” Chutkin is pushing the trial out and she is as ideological as they come. Rats scurrying from a sinking lawfare ship. Now, flip to a hard recession, Trump struggles with domestic issues, stagflation comes back into the mix during his first year, things are a mess. The AI in the basement of the Rand Corp. has all sorts of tricks up its silicon sleave.
Last time we have covid. What are we in for next?
“Just cancel my student loan and I will vote blue!”
Federal judge just stopped the latest Biden Harris Student loan forgiveness implementation. This is going to piss off A LOT of people. Biden tells them he’s forgiving their student loans and multiple federal judges block them. There is NO way Biden is going to win this when going through the court system. The Supreme Court has already ruled it’s unconstitutional.
By all means, the fed should drop rates 100 basis points this month. Only last week, we were in for a soft landing.