Unemployment / Initial claims momentum for recession watching
Unemployment data is clearly one of if not the most important data sets when it comes to predicting a recession. With unemployment at very long term lows, when does this break, and what happens when it does? For me, I watch exponential moving average crossovers in unemployment data. Initial claims works if you smooth it out (it's a high frequency data series).
The key takeaway with unemployment is that it tends to trend strongly. Once a direction is established, it will usually keep heading in that direction. Right now, the shorter-term moving average here is curling upward rather fast as we've heard about a series of big layoffs (GM) and potential weakness in the economy. Is this the start of something bigger? We'll have to wait and see of course, I watch for a cross and then sustained upward movement. When an economy gets tight due to inflation, higher interest rates, higher wage costs, and lower demand for big ticket items (as seen in autos, homes, etc) companies eventually are forced to lay people off. As you can probably see, this easily becomes a feedback loop in the economy. When laying off people reaches a high enough point, that affects the demand portion of the consumer economy, which then starts to affect companies bottom and top lines. This then forces more layoffs, defaulting in the credit cycle, etc etc.
Basically, once unemployment picks up momentum, it almost always leads to a recession.
The key takeaway with unemployment is that it tends to trend strongly. Once a direction is established, it will usually keep heading in that direction. Right now, the shorter-term moving average here is curling upward rather fast as we've heard about a series of big layoffs (GM) and potential weakness in the economy. Is this the start of something bigger? We'll have to wait and see of course, I watch for a cross and then sustained upward movement. When an economy gets tight due to inflation, higher interest rates, higher wage costs, and lower demand for big ticket items (as seen in autos, homes, etc) companies eventually are forced to lay people off. As you can probably see, this easily becomes a feedback loop in the economy. When laying off people reaches a high enough point, that affects the demand portion of the consumer economy, which then starts to affect companies bottom and top lines. This then forces more layoffs, defaulting in the credit cycle, etc etc.
Basically, once unemployment picks up momentum, it almost always leads to a recession.