The End of the Recession: A New Indicator Predicts With Startling Accuracy
by Matt Weinschenk, Senior Analyst
Tuesday, May 26, 2009: Issue #1004
What would you do if you knew exactly when the end of the recession would be?
Pour your cash back into the market? Hire a few new people at work? Or just sleep a little bit easier at night?
Every week, a government report is published that provides the only number needed to pinpoint the end of the recession. And in four of the last five recessions this number has peaked four to six weeks before the turnaround of the recession (and in the fifth, it was only two weeks late).
Don’t forget, the market is always ahead of the economy – but predicting the recession’s bottom four to six weeks ahead of time could be more of a profit-maker and less of a parlor trick.
It’s all available in the weekly unemployment report released every Thursday by the U.S. Department of Labor.
Here’s the interesting thing: For decades, investors and academics have scrutinized the unemployment figures to get an edge… but it never really seemed to be there. Unemployment rates are lagging indicators that show hiring after the economy has already picked up steam. By then, the market is already rolling at a full boil.
But they’ve been looking at the wrong number…
Pinpointing the End of the Recession Through Initial Jobless Claims
New research from Bob Gordon, macroeconomist and member of the NBER business Cycle Dating Committee, reveals a shockingly robust indicator – based on unemployment – which pinpoints the end of the recession.
What it’s saying right now shouldn’t be ignored. And there’s a trick to it: Don’t look at unemployment rates, look at initial jobless claims – which measures newly unemployed people filing for their first unemployment benefits.
It makes sense that this number “getting less bad” would be good. But how does it stack up as an indicator?
By comparing the four-week moving average with the official ending of the recession, you’ll see a strong pattern.
The ends of recessions were predicted four to six weeks ahead of time, for four out of five recessions. That’s an impressive track record. Even the off-value, the 1991 recession, was still identified within three weeks of the recession’s bottom.
After knowing that, I’m sure you’re just as curious on initial jobless claims numbers right now. Take a look.
New claims peaked on April 4. On Thursday, the Department of Labor reported an additional 12,000 decline in claims from the previous week.
Just because initial jobless claims have declined a bit since April, what’s to say they are not going back up again? How do we know this is a true peak?
Gordon provides a wealth of evidence to suggest that this is not a false peak.
For one, the recession is already 68 weeks old. Second, past false peaks have typically come at about 81% of the eventual true peak. If that holds, we’d be looking at an eventual peak of 730,000 to 800,000 new claims per week. That’s not impossible, but it’s unlikely.
Working in Many Markets & Recessions
There is also the typical concern that, “this time it’s different.” That’s why it’s important to note that each of the recessions examined had very different causes and characteristics.
Now we’re simplifying complex interactions in grouping these economic cycles…
- After all, the 1973 recession was triggered by a quadrupling of oil prices,
- The 1980s’ recessions were due to tight monetary policy to curb inflation,
- The early 1990s’ recession was, in part, caused by the savings and loan financial crisis,
- And 2001 was the collapse of the Internet bubble.
Regardless of the details, there is a clear indication that initial jobless claims can be useful for prediction across many types of recessions.
Turning An End of Recession Prediction into Money
Stepping outside of Mr. Gordon’s analysis, what does this turnaround in the economy tell us about the movement of the stock market? Well, take a look at the last recessions and their S&P 500 market lows.
The average lead-time from bottom to recession’s end is just over four months.
It’s unlikely that we’ll go any lower than the March 6 lows, but it doesn’t mean we won’t see a significant pullback from the recent rally.
And this isn’t the only indicator we’re seeing of increasing economic activity. The Baltic Dry Index has posted sharp gains in recent weeks.
And there are indications that Los Angeles port traffic is up as well, which is a boots-on-the-ground indicator of an increase in international trade.
So what should you do today?
The Best Market Strategy For Investors
For most investors, the best strategy is to stay invested and asset-allocated at all times. There have been dozens of studies to prove this that I won’t rehash here.
If you’re still sitting on the sidelines and contributing to the massive cash buildup, hopefully this ‘end of recession’ indicator should give you enough confidence to start moving back into the markets.
You might find the market is taking off without you in the coming months if you don’t…
Ahead of the tape,
Matt Weinschenk
Related Investment U Articles:
- The Double-Dip Recession: Four Reasons to Put This Talk to Bed
- When LinkedIn Goes Public, Here’s Why You’ll Want To Be on Board
- The Future of China’s Economic Growth
- You Can No Longer Trust This “Leading” Economic Indicator
- The VIX Indicator: Watch This Index to Gauge the Market’s Mood… And When to Profit
14 Responses to “The End of the Recession: A New Indicator Predicts With Startling Accuracy”
Comments
**By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy. |
 |
What about the $850 trillion in OTC derivitives
not yet due yet that are backed by commerical realestate,auto and consumer loans. Values of these for the most part are under water. Globally you can add another $550 trillion to that. Nobody in the Main Stream Press, Govt or In Financial circles talks about these. Makes the subprime problem look small in comparison. How will our Govt. explain to the American people that they didn’t see this coming?
Reply
This unemploymet indicator will not predict the end of the recession. Oil production from all oil fields is falling and the the falling rate is accelerating. As the world economy starts to improve the demand for oil is going to burgeon. With burgeoning demand and falling production shortages are going to occur. Oil shortages are going to act as a govener for the world economy. I think “it’s different this time”.
Reply
Not only is this not the end of the recession, it is the first inning of the depression that we are entering. This will be a hyperinflationary depression, and the only thing going higher for now will be commodities. Stocks may join the party later as cash is moved to anything other than cash as people come to the realization that their buying power is being diminished as the dollar crashes.
Reply
You could be right but have you taken into consideration that those initial unemployment numbers don’t yet contain the auto industry workers? How many dealerships are due to close? I think I’ll wait a bit longer…going to be a long hot summer.
Reply
Why did the writer of this article not include the recession of the early 1930′s? It was not even mentioned in a way to at least try and dismiss it. That recession of early 1930′s was caused by a credit bubble popping. Which is the same type of bubble that is now causing our current recession. Maybe it could be argued that the Fed is using more to fight this current recession but early 1930′s needs to be at least included in the comparison chart because it is the most similiar type.
Reply
Gordon states in the article that the data from which he draws the conclusion is available from 1967, thus 1929- is not included. BD
Reply
1. In the “Gone Fishing Portfolio” book, the performance through 2007 was provided. What was the performance for 2008, compared to the S&P 500 Index?
2. How did this portfolio compare to Sjuggerud’s “225-day” moving average Buy/Sell signal since 2000?
Note: Both answers to be based on Total Returns.
Thanks,
Ed Huggins
Reply
I am not as optimistic. We are going to have to reduce or staff 10-15%. The business is not there and our projects are longer term. Some of our sub suppliers have already taken major action.
We are a manufacturer of heavy machinery. The next round will be flesh and bone.
Reply
It is not called a sucker’s rally for nothing. That is not to say that suckers are stupid, but to see your way through this, you need to have a firm idea about what is going on, and, of course, you ultimately have to be right too.
This is a rally built on desperate hopes on inflating an economy ruined by the richest in the world. I am not going to support them with my hard earned cash, I buy gold.
I can’t eat gold, i hear you say, but you try and eat you certificates and your paper money, they won’t do either.
The economy is run by criminals, they have already stolen most of your savings, they will be back for the rest!
Reply
I guess if you call December 2008 a peak in Initial Jobless Claims, then the April 2009 looks like a peak as well. NOT
Reply
Ridiculous tripe. “New” indicator? “the market is always ahead of the economy”? “a wealth of evidence [that] suggests this is not a false peak”?
This sort of wide-eyed prediction is just wishful thinking, drawing false conclusions about correlation from tiny datasets, and pandering to the innate human need to be right. The market will do what it will do, and trying to predict the future is a game of chance, nothing more. Real market wizards understand this. Enjoy the spoils of foolishness.
Reply
There is not nearly enough data points here “4 out of the last 5″ .. please! What abt the GE and Chrysler bankruptcy ripple affect in jobs that will be felt in the coming weeks and months?! I think a better indicator is CONTINUING claims which keep going up meaning people are on unemployment and can’t get a job!
And of course in a few months when the 1st clip of lay offs start coming to the end of their unemployment coverage perious these numbers may “seem” to level off but thats just a farce ..
Reply
The flaw in this argument lies in the phrase, “regardless of detail.” This is the central delusion inculcated by business schools worldwide.
MBAs and financiers would love to live in a world where they needn’t bother to understand the messy complex details of the businesses and/or financial instruments in which they invest.
And hasn’t *that* worked out well for everyone?
All of the above mentioned crises, were, in comparison to what faces us now, relatively small, numerically speaking. As Jack Erb pointed out, there remains about $850 trillion in notional OTC derivatives exposure worldwide (a.k.a. “The elephant in the room”).
While some would claim this is a notional value and is (ahem) “revenue neutral,” it doesn’t matter. Even small changes in the economy can trigger unpredictibly large changes through the mechanism of custom derivatives. As long as this condition exists, all bets are off regarding a recovery.
Reply
Sooo much done on this already
Reply