I have not updated a pair of recession indicators for a while, one of them is mine. Let’s discuss.
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 is likely.
Edward McKelvey, a senior economist at Goldman Sachs, created the indicator.
Different Trigger
The problem with the indicator is that it has many false positives.
I suggest a higher trigger. If we use a trigger of 0.4, the number of false positives since 1953 drops from five to two.
For six consecutive months McKelvey has been at or above 0.4, with the last five months above.
An Alternate Trigger
I devised a second moving average indicator based on 15+ weeks of unemployment.
Consider the following chart.
U1 Unemployment 15+ Weeks
It’s clear the above chart is troubling. But how troubling? Recessions can start at levels as low as 0.29 percent or as high as 2.09 percent.
But it’s the direction and rate of change that matters the most, not the level.
Using the excellent work of McKelvey as my guide, I created the following chart.
Mish McKelvey-Style Recession Indicator
What is the Mish McKelvey-Style Recession Indicator?
Take the current value of the 3-month moving average of the U1 unemployment rate average, subtract the 5-month low, and if the difference is 0.20 percentage point or more, then a recession is likely.
My indicator is a more lagging indicator that McKelvey and it needs to reset. The apparent false positives in 1992-1993 can be discarded as continuing weakness from the previous recession.
In 2003, my indicator nearly reset to zero, hitting 0.02. That’s close enough. I concede a false positive on the rise to 0.24 in August of 2003, using a reset trigger of 0.10.
Synopsis
We have a leading recession indicator (McKelvey) and my more lagging indicator both giving recession warnings.
My indicator weakened to 0.19. That’s partly because of a faster rollover (5 months vs 12). But historically, dating to January of 1948, any signal above 0.15 on my indicator is a warning.
McKelvey ticked up slightly in November to 0.44 from 0.43 last month.
Together, the indicators imply a very strong warning that something is seriously amiss in the labor markets.
It’s maddening when you wake up and find you have been lied to about mRNA technology, origins of covid, Putin is a monster, inflation is transitory, and on an on. So what do you do? Turn on some Netflix to just forget about how stupid you were for believing your government had your best interests in mind, but only to realize every show you click on has DEI woke scenes promoting and attempting to normalize homosexuality and transgenderism which ultimately adds to your frustration. Then you remember go woke, go broke. You unsubscribe to netflix to play your part and start reading MISH.
The next crises is just around the corner, but this time you are ready for it.
Indicators retracts sometimes, but once they trigger, their signal are valid ones for a while. My unemployment signal was trigered then unemployment fell from 4,3 to 4,2 to 4,1 and 4,1. Recently it rose above 4,2. It was the first time in history that the unemployment diminished more than two months after my unemployment signal triggers. I continue to believe in indicators like yours and mine.
Hmm…The better indicator is consumer delinquency rates on Credit Cards and personal loans. These have thresholds that show financial fragility prior to trigger events. Not close today and no recession possible unless we inflict one on ourselves.
At 6% of GDP or more, deficit spending–to wit, spending by the dependent sector euphemistically called “public”–doubles the putative 3% GDP growth. It is hard to believe that the productive sector (nothing “private” about it) isn’t already in recession.
It does appear that the Biden administration gunned it, accelerating spending before the election, to try to elect Kamala. $264 billion in the most recent 2 months. Take that away, and does anyone doubt we’d then be in recession?
I think we are already in a recession but they are holding back the bad news until the next year starts. In the meantime, we can have the “Santa Claus rally”, year-end window-dressing rally and other such good stuff.
Trump is causing instability deliberately to try and blame Biden. But we know things were stable until Trump got elected. You can argue til your blue in the face about it. A few months from now, many will be wishing Kamala had gotten elected. FWIW, here is the popular vote count. Yes Trump did not win a majority and there was no popular landslide. In case you are counting. It is 49.9% for Trump and 50.1% against Trump.
Define “stable”.
Stable as in the monthly, quarterly, and annual (downward) revisions to monthly BS, sorry, BLS jobs reports that we have come to expect for the last several years?
Stable as in the stability of the disparity between GDP and GDI?
Some other kind of stable?
I didn’t release that Mish installed a comics section here.
DOGE. They came, they saw, they conquered.
The administration was hiring over 40,000 workers per month, earlier this year, to stimulate before the election and to work with migrants.
That worked against the McKelvey and Sahm rules.
Texas Gov. Abbott has purchased billboards in Mexico and Central America warning migrants they risk being raped if they cross the border.
I’m not against dissuading immigrants, but threatening to rape them is a novel approach. I’ll have to give it more thought. At least he’s open to trying new things.
The prospect of being raped is about 10,000% higher BEFORE they reach the border.
Anyway, this sounds like another internet myth..
“My indicator is a more lagging indicator that McKelvey and it needs to reset.”
Mish, I do appreciate your hard work with all of this analysis, but it’s obvious that something(s), gov spending, immigration demand of goods, etc, that’s holding the recession at bay.
I would surmise the main cause is the two years of furious refi’s that gave a lot of families extra room in their budgets or wads of cash in their savings. Add to that higher rates for longer and you get a lot of excess demand & spending.
And as always, until initial claims move above 250K and stay there for at least 6 weeks and we see continued claims push past 2M, then we can say with good certainty that a recession isn’t imminent.
Be that as it may, 2025 will definitely give us ample opportunities to push over the final hump into a recession. It seems almost certain in my opinion. The GOP takes all three branches for not more than 2 years and then they lose the midterms due to a recession.
Terror attack in 🇩🇪. Very sad
Saudi Arabian Doctor ?
If so, Germany should invade Iraq and about 6 other countries over the next 5 years. Remaking the Middle East into a democracy is the obvious solution that we can all agree on.
PNAC Plan, lol. That plan must’ve been dreamt up while the “people that know better than us” were in the throes of a cocaine/adrenachrome/pedo frenzy.
Been done, didn’t work out so good for the Plebes.
The U.S. Neoconz and Soros’ “Open (borders) Society Foundation” have destroyed Europe and are now focused on the USA.
If I were a German (or ANY European) I’d be hating the American Establishment (and their own) like a mofo.
No more cheap gas, no more financially viable heavy industry, no more good jobs.. social welfare system go B00M.
But hey, the trade off is plenty of schwacked immigrants that want to SUV/Behead me and my early retirement is GONE-ZO..
Gaza genocide is still going on. Very sad.
How true it is: “Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist.” —John Maynard Keynes
Have you had any thoughts regarding the oft-raised concerns that these datasets are not fully accounting for population increases (illegal immigration in particular), and as a result are undercounting employment and overcounting unemployment?
I think the logic is that the Household Survey is extrapolated from a small sample to the full population by using an estimate of the full population size. If the population is actually larger than estimated, then total employment is higher than the Household Survey indicates. Illegal immigrants would tend to be under-represented in survey results and state continuing claims data as well.
P.S. One could flip this around and argue that given the importance of accurate understanding of the economy in order to manage it, proper border controls and rigorous immigration procedures are essential.
Good post
Something like what you suggest is theoretically possible, but in practice highly unlikely for multiple reasons.
I like the question and have thought about this already.
I will explain in a post.
I look forward to it. I think the underground economy is larger than most experts think. There is literally no way to account for it. I see economic activity like never before in my locale where housing and construction have been booming for many years now and continue to do so. And this is in California, which supposedly has a dead economy.
Good point. Maybe one but unpalatable option to collect taxes from the underground working economy is to institute a national sales tax to capture this. Income taxes could be eliminated or significantly reduced. Hopefully some fiscal discipline in govt would use this extra captured tax money to reduce the deficit and national debt.
Agreed. I’m also in California, and the amount of money sloshing around here is truly amazing. I’m sure some people are hurting, but we appear to be a long ways from a recession here.
I’ve posted about this here several times. The Census Bureau came out with its revised population numbers yesterday: https://www.census.gov/newsroom/press-releases/2024/population-estimates-international-migration.html.
The short is the population revision for the past couple of years is significant and it’s mostly from immigration. Now the BLS will incorporate these higher revisions into its January report. So it’s VERY likely the past household survey numbers will increase because as Wisdom Seeker says here (and I’ve said in the past) the household survey is a relatively small sample that is then aggregated for the entire population. If the sample is representative, but the population size has been underestimated, then the employment numbers estimated from that survey will likely be low, and likely revised upwards to better match the establishment surveys (which are larger).
So I’ll bet big the employment numbers will rise. But we won’t know for a couple of weeks how the unemployment rate will be revised. We’ll likely have both more employed and more unemployed, so the percentage rate could increase, decrease or stay the same
By and large, on whatever uncounted jobs exist, no Federal, State, Medicare, etc is being extracted to feed the system, so those jobs are a not really a benefit to The System.
Yes, those jobs create consumption, but the net loss is not small: Illegal Aliens are a financial drain to the tune of $120-$160 billion per year according to the federal gov’s calculations.
They drain nearly every social welfare trough that exists in this country.
Federal, State and Local are tapped by these illegals and the lower and middle class Americans are the end victims..lower wages, higher rents, crime..
The poor pay a huge cost for the open borders.
Inflationary depression is what you are looking for.
Can’t be sustained for that long. Growth and inflation have effectively been the same the last decade. It is the x/x/x economy where growth/inflation/FFR are all equal.