The McKelvey-PMES recession indicator dipped a bit in September but the signal still implies recession. 
100 percent of the time, with no false positives or negatives, under current conditions, the economy has been in recession.
The odds are not 100 percent because the NBER sets recession dates, not these charts.
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.
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.
That touches all the background bases. Now let’s look at the charts that comprise the lead chart.
Unemployment Rate vs Job Opening Rate
Openings dwindle in recessions while the unemployment rate tends to rise.
Combining the two ideas makes for a better indicator.
McKelvey Recession Indicator
McKelvey has had five false positives.
Job Openings PMES Recession Indicator
PMES has likewise had false positives. However, the PMES false positives do not overlap with McKelvey false positives.
Combining the two indicators (the minimum of PMES and McKelvey) creates the lead chart.
For example the PMES reading is 0.78 and the McKelvey reading is 0.48. The Minimum is 0.48 shown in the lead chart.
The McKelvey Recession Indicator Triggered, But What Are the Odds?
On September 10, I posted The McKelvey Recession Indicator Triggered, But What Are the Odds?
In the above link I go over a method of calculating recession odds based off McKelvey alone. As numbers rise, the odds of recession rise exponentially not linearly.
Between 0.4 and 0.5 the odds of recession are over 50 percent and that is based off a single indicator, not both.
September Jobs Report
Finally, the September jobs report is more than a bity screwy, impacting the above calculations.
For discussion, please see The BLS Reports Jobs Rebounded More Than Expected in September
The BLS reports payroll employment rises by 254,000 in September. I discussed two reasons the report is suspect.
Also see Government Employment Rose by an Amazing 785,000 in September
I am confident something (many things?) went totally nuts in BLS sampling or assumptions.
The economy did not suddenly add 785,000 government workers in September.
There are two factors that must be in place for Ponzi schemes to continue operating. First, there is a steady supply of fresh money, which is why so much has been produced out of thin air in the last three to four years. The second factor is the ability to modify data. One example is that approximately 815k jobs vanished out of thin air yet were included in the month-over-month figures for 2023. Another example is the 785k government employment jobs that were included in last month’s unemployment report to keep the rate from dropping. People will eventually discover that 85% of jobs are pointless, but in the meantime, enjoy the climb up.
All the election year deficit spending that prevents economic breakdown delays the inevitable.
Nothing will stop what is coming.
It does buy time for those who can see thru what is occurring to batten down the hatches and get Liquid and solvent.
YTD, Continued unemployment claims are up by only 1M. Along with the fact that 1st-time claims have remained quite stable over the same period, this indicates that the labor market remains quite resilient.
There’s no looming recession on the horizon.
John Carney with Breitbart Business has a great article out today laying out the case that the Fed’s Sept rate cut was all about politics & kowtowing to Warren & others in Congress.
I totally agree. Good or bad, the illegal immigrants are adding a lot of aggregate demand for goods, food, services & especially labor. Unfortunately, some are adding a lot of bad stuff as well. Crime & drugs are the obvious outcomes, but that $1B in government spending is less obvious, unless you live in NC & FL.
Helene & Milton are going to stimulate demand for many months. And unfortunately, everyone who doesn’t live in these two states will see their homeowner’s & auto insurance rates rise dramatically next year for a 4th year in a row.
Almost every component of housing is nearly guaranteed to rise well into 2025. The middle east is going to ensure oil has a real chance at moving higher.
They don’t call it an inflation super cycle for nothing.
Countless studies have shown that immigration benefits job economies and local economies. They also show that crime rates go down when immigrants move in. Don’t believe the talking heads, unless you think science is for suckers. Trust the scientific studies that have been done for many years, or read a book by an expert called How the Immigrants Saved the American City – about the 1980s.
If you think immigrants rip communities apart, you’re the sucker being played by xenophobes.
I look to Sweden, Germany, Italy, France, and the UK to differ with you. And I always counter clowns like Schumer who say that “we need folks to do work and these are bodies” as if we are matching the jobs needed 1:1 with the bodies arriving both in skill and integrity. How about through a legal, controlled process rather than random illegal crossings whereby anyone fits the bill, we resettle them, fund them, by confiscatory tax policies or redirecting other funds. Imagine showing up for a skilled job and just telling the hiring manager you’re there for the job and to criticize their audacity should they demand I have the skills. I mean c’mon man, you don’t have UNFETTERED, UNVETTED immigration as a good thing that would be a purely fantastical statistically impossible miracle but you can have controlled, vetted immigration and have that be a net positive. You wanna tell me it’s a good thing then you and ilk like you volunteer to take as many as choose to come, into your home, your city, your schools, your hospitals.
Legal and controlled immigration <> illegal, uncontrolled migration
Failure to include the most important adjective “illegal” or others like “endless”, “criminal”, “uncontolled” and instead using simply immigration in your comparison is silly.
There is no question that demographically post Baby Boom there will be a decrease that would require increased birth rates and/or legal immigration but I see no good in flying in planeloads, at taxpayer expense, the first 250 each day that roll across, into cities that didn’t grant permission nor request them nor appropriate and allocate financial resources to deal with them. Imagine a parent learning that this school year there are 45 new students speaking 4 different languages and your American, English-speaking student is just S.O.L.
You can see why the studies you reference are less instructive than what is occurring in Europe and now here, right?
Rando has no idea what he’s talking about, at least in terms of the real world consequences of letting 25M into the US and open borders in general.
Countless, unnamed studies that are written by a bunch of globalists who want open borders. I’m not the sucker, Rando!
Increasing demand when most supply of things is constrained causes inflation. Far from every illegal is doing bad things, but the ones who are make up for it. There’s ZERO downside to closing off the border, deporting as many of the millions as we possibly can and prosecuting companies who knowingly hire illegals.
From there, you let in people through legal immigration based on merit first and the needs. For example, it’s not going to be too many years down the road that automation is going to start wiping out crop harvesting which is that type of job everyone says Americans won’t do. Well, that probably is the case, but what are we going to do with all the illegal migrants when they’re not needed to pick most of our fruit & vegetables?
And along the way, you take a long approach to things like welfare and education. If we are to be holistic in our approach, we’d stop sending so many people to college and push able bodied persons towards trades.
You eliminate the waste & abuse in the welfare system that lets people sit at home rather than working. And there’s a ton of waste & abuse of monies going towards all sorts of illegals who are here not working and living off our welfare state.
You create a massive PSA campaign that educates people about where the good jobs are, and you might even provide them with moving assistance. It’s about time we turn America into a country that knows how to work for a living using their hands making things. The construction industry is rife with being rebuilt from the ground up with American labor.
Would it cause some amount of inflation? Sure it would. But we’d have fewer illegals & Americans for that matter engaged in crime & drugs, because whole cohorts of people would become more self-sufficient.
Think of how much better our education system will be, if we don’t have to educate millions of illegals? That’s an enormous amount of money & time going to non-citizens when it could be making our K-12 education system much more globally competitive.
The whole system needs to be replaced.
The recession has been suspended until the election. All government generated statistics have been order to conform.
this model/indicator relies on BLS & other FedGuv statistics…
…Garbage In, Garbage Out.
Well until Trump gets elected and then by some miracle, the data & policies will all of a sudden start to represent reality.
The only miracle is us evil Satanists printing an extra 50MM votes, “just to make sure” isn’t that what Mango God says?
The economies of the world are being run in reverse. Not only do banks not lend deposits, but savers never transfer their holdings outside the banks unless they hoard currency or convert to other National currencies.
see: “Commercial Banks and Financial Intermediaries: Fallacies and Policy Implications–A Comment Leland J. Pritchard Journal of Political Economy Vol. 68, No. 5 (Oct., 1960), pp. 518-522
“The case against commercial bank saving accounts”
Leland James Pritchard 1964 Banker’s magazine
“The economics of the commercial bank : savings-investment process in the United States” Leland James Pritchard 1969
“Should Commercial Banks Accept Savings Deposits?” Conference on Savings and Residential Financing 1961 Proceedings, United States Savings and loan league, Chicago, 1961, 42, 43.
“Profit or Loss from Time Deposit Banking”, Banking and Monetary Studies, Comptroller of the Currency, United States Treasury Department, Irwin, 1963, pp. 369-386
Link: The riddle of money, finally solved BY PHILIP GEORGE
So, with C-19, the shift in the composition of deposits, from TDs to DDs has increased AD.
Nothing has changed in > 100 years. Contrary to economic theory, & Nobel laureate, Dr. Milton Friedman and Anna J. Swartz (“Money and Business Cycles”), monetary lags are not “long & variable” (A Monetary History of the United States, 1867–1960, published in 1963).
The lags for monetary flows, M*Vt, i.e. the proxies for (1) real-growth, & for (2) inflation indices (for the last 100 years), are historically, mathematical constants.
Contrary to Nobel Laureate Dr. Milton Friedman, there is no “fool in the shower”
“Extrait du Bulletin de ISI of 1937”. – History and forms. Irving Fisher (1925) was the first to use and discuss the concept of a distributed lag.
In a later paper (1937, p. 323), American Yale Professor Irving Fisher stated that the basic problem in applying the theory of distributed lags:
“is to find the ’best’ distribution of lag, by which is meant the distribution such that … the total combined effect [of the lagged values of the variables taken with a distributed lag has] … the highest possible correlation with the actual statistical series … with which we wish to compare it.”
…Thus, we wish to find the distribution of lag that maximizes the explanation of “effect” by “cause” in a statistical sense”.
I.e., there are no “false positives”
i still don’t know a single soul out of a job, that wants a job. i know dozens of college kids, all work. i know tons of geezers in the 4 states i’ve resided, plus FL which is retirement and steam bath and plunge for new yorkers for decads……………..NOT a ONE.
It’s not even that, if you want a job and have a car you can instantly Uber, Instacart, DoorDash, etc. It’s easier than ever to become your own business person anytime anywhere. There are also endless apps to be a laborer for hire.
great point. i don’t have an auto. i’ve tried selling my body for sex by the hour. but i’m 64 and the college gals where i attend at 2 different schools here in gotham city, for fun, have not seen the value proposition. yet.
Maybe “increase” the ‘value’ of what you’re offering
i’ve tried everything. even the hair club for men.
Yup people must be wrong about how they feel about the economy. In fact it should be a landslide for Harris based on just how good things are.
That’s exactly how recessions start. Jobs are not scarce yet when a recession starts – that only happens in the depths of the recession.
In the early stages of a recession, “unemployment” stays low, but some full-time workers have to shift to part-time work. That shift is visible in the data right now, full time jobs down and part-time up.
Nowadays with all the gig-type service jobs, unemployment doesn’t rise right away. A town with 100 Uber drivers can also support 110 drivers, so no one is “unemployed” who’s willing to drive, but they will all make 10% less in fares. That’s still consistent with a recession.
The JOLTS “quits” indicator also shows fewer people are choosing to trade jobs voluntarily in recent months; this is usually because they can see their business slowing down and don’t want to be the low-seniority person when the cuts happen…
I see few signs of recession other than the chart shown. Until I see retailers rolling over, coming up with sales to entice folks or housing rolls over or the wealth effects of high asset prices reverse I’ll just consider the chart a “leading indicator”. With all the promises of spending coming out of candidates mouths with a Congress that has absolutely no hint of fiscal restraint, until something big truly breaks, this baby is gonna muddle through and Papa Dave will rake in the profits. However, when something big truly breaks there’ll be lots o’ folks ill-prepared to handle it as we haven’t really seen an economic recession for 16 years, the pandemic version notwhithstanding. Hell I recall SVB bank getting rolled up and protected with rapidity, you can bet Powell, the shrew Yellen and whomever is occupying that office come January will treat all threats with equal urgency and scale…until they cannot. No one I speak to is discussing “the economy” at the moment so until that changes I see no official recession. Many people have just assimilated the inflation and the need to work multiple jobs to get by and a bit of ennui has set in to youth and other subgroups, a latent sense of accepted hopelessness or settling for where things are at. Your mileage may vary….
One of the best indicators of a recession is construction, especially jobs.
Until construction starts to roll over and leads other industries to start cutting jobs, then it’s an inflation induced super cycle of solid demand, labor market & GDP.
The Fed should have waited until Nov when a clearer picture of where the economy is headed would have been evident.
They were behind the curve in early 2022. Then they stopped raising rates too soon, and now they’re ahead of the curve in 2024, assuming the economy is weakening significantly, when it’s not.
And my belief is that all these models have broken down because the demographics of the country have changed to something no one has seen or modeled before.
Right now we have 76 million people receiving $140 billion/month in free money, this alone can keep any economy afloat. Add subsidized medicare and that’s another trillion. And those numbers continue to grow! But it doesn’t stop there, we have 10k+ people retiring each day which leaves an employment void which is why unemployment is at 4.1% even though we are in a “recession.”
And it doesn’t end there, add the lowest birth rates the last decade and insufficient numbers of young people to back fill empty jobs means the people that want a job are kept fully employed. Years after COVID, we still have labor shortages in every major city.
Then on top of all that efficiencies through AI and some robotics have made firms more profitable to shell out returns to shareholders so the asset class holders get richer and have more money to spend/invest/recycle into the economy.
And none of this is something that will revert to old economic models, the elderly population will continue to grow, Gen Xers are next to line up for social security then Millennials (oldest are now in their 40s). And of course, ultra low birth rates will exacerbate labor shortages.
It’ll be hard to ever call a true recession with so much free money slushing around the economy, low unemployment, and insufficient labor. We would need a black swan event to trigger it like another pandemic, WW III, or mega defaults.
It’s time for new models.
If there is a surprise it’s that the stock market is still going up even with so many people entering the drawdown phase of their lives.
Eventually so many living off the 401k and IRA has to put downward pressure on the market, but not yet. Pushing back the RMD age might be part of it, but not all of it.
You need to remember that 80% of the wealth is controlled by 20% of the people so until the top 20% start selling, there will be negligible effects to the market from draw downs.
when you mouse click trillions in currency and give it to the 1% in the C suite of MIC and wall street and big ag…………..i’m just shocked the dow isn’t much higher.
Yes, and there have already been studies completed about why the current statistics from the ‘old’ models being used have to be taken with a grain of intuitive salt (and it’s not a giant political conspiracy reason).
It is partly the rapid increase in Boomer retirements (although those have been projected and and so utilized in the models already). But it’s also a lot about the recent immigrant surge (which people on this site cite a lot). The Household survey (which is used to calculate unemployment numbers) uses Census data – which is only constructed/taken periodically obviously – to estimate population to be used as a denominator in many of these statistics. If actual immigration is higher than projected by the models, then the models underestimate population which affects averages like the unemployment rate. Eventually, more Census data will emerge and those population estimates will be updated/revised.
For example, maybe the unemployment rate is increasing because native born Americans are losing their jobs in droves and a recession is nigh – or started a year ago (as Booth has said). Or maybe most of those Americans still have their jobs (or at least normal turnover) and a lot of immigrants have arrived recently and are looking for jobs (and refugees and asylum seekers can do so on the up and up) and so are showing up within the unemployment numbers (the numerator) but are not yet modeled within the population numbers (the denominator). So unemployment rate is rising. Or maybe both are happening simultaneously.
But the why the UE rate is increasing is important. If the former from above, the recession is coming and watch out below. If the latter is occurring more, it means more people in the US, more workers, more production, more GDP, etc. and that can mean a lot of extra stuff for everyone and higher stock market profits coming.
No one knows for sure, but there is an alternative explanation.
More technical explanation for above:
https://www.brookings.edu/articles/strong-labor-market-boosted-us-born-employment/
This Time is Never Different.
That’s why I love markets; everyone gets to have a (financial) opinion.
If Booth and Lacy are right, and we are in the throes of a recession, then I think – and hope – investor funds will head their way to reward them for out-predicting the rest of the market.
Meanwhile, Goldman Sachs (with its many economists and finance bros/pros who are also paid to outguess others) just lowered its 12-month future recession probability to 15%. And the GDPNow forecast for Q3 was just raised to 3.2%.
Somebody’s going to be right, and somebody’s going to be wrong. Only time will tell
It is not free money, but money transferred from working people to retired people who in turn did the same thing for retired people when they were working. It is not that big of an economic stimulus as you think. SS paid minus SS collected equals the stimulus or drag on disposable income.
I also think that you may be the ONLY Commentator out there that BLEW THE LID off of the SAHM bullshit.
You misspelled her name here, by the way: “Claudi Samn.” You might want to go back and fix that one as many here who are new may not find that name in a Google Search.
YOU ARE TO BE CONGRATULATED for this discovery and letting US know about it and your revisions and commentary here were well written and justified!
Mish, does it not make ANY number used by the mainstream FISHY since we KNOW that Politics (MEANS LYING in my book of definitions) affects the EMPLOYEES OF THE GOVERNMENT who serve at the FEET of their MASTERS, Congress?
Since they are SUPPLICANTS, how can we trust ANYTHING any longer. Considering that this period is PEAK LYING SEASON, nothing can be taken for GRANTED.
Thus any INPUT numbers are to be questioned, not just that 700K plus hiring spree!
More big government please daddy
LOL