Unemployment Jumps and Recessions

Today's payroll numbers were slightly worse than expected, but not terribly so. However, the unemployment rate jumped by 0.4% to 10.2%, a move that is worrying in several respects. Firstly, from a Consumer Sentiment standpoint, it is not encouraging - especially given the high correlation between sentiment and consumption (given that Consumer Credit has been shrinking for a while now, it is not obvious where the financing for consumption growth will come from). Secondly, the Stress Tests specified a peak unemployment rate of 10.3% in the "more adverse" scenario. Given the acceleration in the unemployment rate, it is clear that the trends in employment are not favourable, and a further deterioration seems likely. This could very well bring concerns about the writedowns back to the fore.

But most importantly, there are merely two examples since the official data series was first constructed in 1948 in which unemployment jumped 0.4% month-on-month and was not in recession: 1986 and and 1995. Both of these were mid-cycle slowdowns in the midst of high, above-trend periods of growth. This clearly cannot be argued to be the case now.

In fact, in the observation period, the US was in recession 5.5% of the time and experienced periods in which the unemployment rate increased 0.4% and the economy was in recession 4.6% of the time, implying that the empirical probability that the US is currently in recession is ~82%. Clearly the consensus view that the recession was exited in June 2009 is either wrong, or we are currently entering the much talked about "double dip".