Chart of the Week: Recession? Not for the Job Market

Chart of the Week: Recession? Not for the Job Market

October 17, 2022

The textbooks would tell you that unemployment is a lagging indicator. The theory is that hiring and firing is costly. Employers resist firing workers in the early days of a recession—until things are so bad they have to. On the flip side, employers are slow to bring people back because they wait for the economy to be on stable footing before hiring. That’s the theory.

In reality, unemployment might be a leading (or at least real-time) indicator of a recession. By the time five of the last eight recessions (dating back to 1969) had started, the unemployment rate had already moved above its average level over the prior 12 months. (And in my book, I consider that five out of seven: COVID-19 was an exogenous shock that meant all bets were off.) That means that unemployment was rising before the start of most recessions.

According to this measure, we are not in a recession yet. The unemployment rate in September fell to 3.5% from 3.7%. And that’s below the average of 3.8% over the last year. Of course, this isn’t ironclad. Could we have a recession without unemployment rising materially? I suppose, but it would be strange to see economic growth contracting while employment is still high and consumers are earning an income and, presumably, spending.

Note: Shows the U-3 unemployment rate and its 12-month average since 1969. Recessions are overlaid in the gray bars. Sources: U.S. Bureau of Labor Statistics and National Bureau of Economic Research.

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