Is the Recession Over? Flip a Coin.

James Hamilton at Econbrowser has been looking over initial claims for unemployment insurance the past few weeks. His most recent post suggests a 50% chance that the recession may end by June. Remember that unemployment is a lagging economic indicator so that, if we really are nearing the end of the recession, then this decrease in initial unemployment insurance claims is a very good sign. On the other hand, as Dr. Hamilton points out, there's still a very good chance (50% historically) that unemployment claims could go back up again, something that's readily apparent in the first graph in my post back in February on US unemployment levels.

The Labor Department reported today that initial claims for unemployment insurance fell by 14,000 during the most recent available week. That brings the 4-week average down for the third consecutive week and puts it 3.3% below the peak reached April 9.

Black line: seasonally adjusted new claims for unemployment insurance, weekly since January. Blue line: average of 4 most recent weeks as of each date.


That ongoing drop in the 4-week average is noteworthy because in each of the last 5 recessions, once the new claims number began declining from its peak value reached during the recession, the NBER subsequently dated the recovery from that recession as beginning within 8 weeks.

...

If we leave out the 1970 recession, there are 230 weeks in which the NBER declared the economy to have been in recession during the 5 recessions of 1974, 1980, 1982, 1990, and 2001. In 22 of these weeks, we saw as big a drop as we've seen this month, namely, the 4-week average dropped by more than 3.3% over a 3-week period. Of these 22 favorable readings, 11 turned out to be part of the final move out of recession, while in the other 11, new claims turned back up to reach a subsequent higher peak. Thus, if all you had to go on was the data on new unemployment claims and its behavior in previous recessions, you might conclude that there's a 50% chance that an economic recovery will have started by the beginning of June.

For some other possible signs of "green shoots," check out Bonddad's post on inventory levels in the 1Q09 GDP report.