Note: This commentary has been updated to include Nonfarm employment for July.
Official recession calls are the responsibility of the NBER business Cycle Dating Committee, which is understandably vague about the specific indicators on which they base their decisions. This committee statement is about as close as they get to identifying their method.
There is, however, a general belief that there are four big indicators that the committee weighs heavily in their cycle identification process. They are:
The Latest Indicator Data
As the adjacent thumbnail of the past year illustrates, Nonfarm Employment has been in a steady upward trend. Today's report of 215K new nonfarm jobs in July was a bit below expectations. However, the June number was revised upward by 14K and May by 6K, which gives us a net gain of 235K for July. The unemployment rate remains unchanged at 5.3%.
The chart below shows the monthly percent change in this indicator since the turn of the century, a period that includes two recessions.
The Problem of Revisions
At first blush this indicator appears to have a strong correlation with the business cycle. However, there is a major problem with this assumption: The data in this survey of business establishments undergoes multiple revisions. The initial monthly estimate is subject to a first and second revision, subsequent benchmark revisions and annual revisions that stretch back five years. The cumulative size of the revisions is quite stunning, much of which is owing to the “hindsight” of those annual revisions.
The chart below measures the size of the revisions from the initial estimate to the latest employment report.
The Problem of Population Growth
Another problem with the Nonfarm Employment data is that it isn't adjusted for population growth, which reduces its usefulness in illustrating secular trends. The chart below incorporates a population adjustment by divided Nonfarm Employment (FRED series PAYEMS) by the Civilian Labor Force Age 16 and Over (FRED series CLF16OV). We've added a couple of trend lines and pointers — not to suggest a forecast but rather to highlight the potential impact of a near-term business-cycle downturn.
