Mike Shedlock, writing on MishTalk.com, revisits his analysis of recession indicators, particularly focusing on the McKelvey Recession Indicator, originally established by Edward McKelvey at Goldman Sachs. This indicator tracks the interplay between the current 3-month unemployment rate average and its 12-month low. Specifically, if the difference exceeds 0.30 percentage points, it suggests a likelihood of recession. However, Shedlock points out that the McKelvey indicator has a significant history of false positives. To address this, he proposes raising the threshold to a 0.4 percentage point difference, which would reduce the number of false positives from five to just two since 1953. Notably, the McKelvey indicator has maintained a value at or above 0.4 for the past six months, raising alarms about potential economic downturns.
Shedlock goes on to introduce an alternative measure he developed, which is based on the unemployment rate of individuals who have been unemployed for 15 weeks or longer. He references a specific chart displaying this statistic, highlighting its perturbing trend. While the levels of unemployment that precede recessions can vary widely, he emphasizes that the crucial element is the direction and rate of change of these unemployment figures, not merely their absolute values. Using McKelvey’s foundational work, Shedlock has constructed the “Mish McKelvey-Style Recession Indicator,” which tracks the 3-month moving average of the U1 unemployment rate and compares it to the 5-month low. A difference of 0.20 percentage points or more signals the possibility of recession.
This new indicator serves as a lagging measure when compared to the original McKelvey indicator and requires adjustments following significant workforce shifts. Historical anomalies from the early 1990s can be viewed as results of the lingering effects from the previous recession. There were notable movements in 2003, where Shedlock’s indicator briefly approached a reset threshold of near zero, before witnessing some fluctuations in the subsequent months. He acknowledges a minor false positive spike to 0.24 in August of that year.
Shedlock succinctly summarizes the status of both indicators, indicating that both the McKelvey and the Mish McKelvey-style models are raising red flags regarding the economic climate. His own indicator was recently noted to have dipped to 0.19, which he attributes to a more rapid decline in numbers over a shorter timeframe. Historically, any reading above 0.15 on his indicator has served as a warning sign of potential recession. Additionally, the McKelvey indicator saw a slight uptick in November to 0.44, up from the previous month’s figure.
The cumulative insights from these indicators portray a troubling picture concerning the state of labor markets and general economic health. The sustained signals from both tools suggest a strong correlation with recession risks, indicating vulnerability within the economy. Shedlock’s analysis underscores the importance of closely monitoring these unemployment metrics, especially in times of increasing economic uncertainty, emphasizing the potential for emerging recession signals that may warrant preemptive action or policy adjustments.
In conclusion, the ongoing assessment of both the McKelvey and Mish McKelvey-style Recession Indicators provides critical insight into the state of the economy and labor markets. With both indicators indicating potential recessionary pressures, policymakers and economists should remain attentive to these trends, considering the broader implications for economic growth and stability. Shedlock’s updates and analyses call for vigilance in understanding labor market dynamics, as early detection of shifts can enable more effective responses to mitigate the impacts of a potential recession.