The most reliable recession indicator has been deteriorating

From Yahoo! Finance today, written by Scott Gamm

The most accurate gauge of recession risk is starting to show signs of weakness.

Weekly initial claims for unemployment insurance rose to a six-month high of 234,000 for the week of Thanksgiving, an increase of 10,000 from the prior week.  This is the third week in a row of increasing jobless claims. The four-week moving average climbed by 4,750 claims to 223,250 as of last week.

This is notable because this metric is one of the more reliable leading indicators of recessions.

“It will be important to monitor the jobless claims data over time,” JP Morgan’s Daniel Silver said following Thursday’s report. “The recent deterioration in the data could simply represent some moderation in activity consistent with our view that GDP growth and payroll growth will slow over time. But jobless claims are also an important input into our recession risk monitors, and continued weakening in the data could become a more worrisome signal for the economy.”

Earlier this month, Bank of America Merrill Lynch economists, led by Michelle Meyer, conducted a study and found jobless claims to be by far the most reliable indicator of recessions.

“We think you should pay particular attention to jobless claims,” Meyer said in the Nov. 14 research note to clients. “In the last seven recessions, the 6-month growth rate of initial claims has, on average, jumped double digits heading into the recession.”

 So, we’ll have to see a couple more reports before the findings from Meyer’s research are triggered. Nevertheless, a six-month high following three consecutive weeks of gains makes this measure worth keeping an eye on.

In terms of the accuracy of capturing the temperature of the business cycle, weekly jobless claims have an error rate of only 5.6%, according to Bank of America, sending false positives only 2.3% of the time. This compares to retail sales, which has a 57.6% error rate and a record of sending false positives 65.6% of the time.

For now, it’ll be wait-and-see as we get more data. Bank of America nothing in the data is signaling a recession — at least not yet.

“The models do not point to an imminent recession” they said. “Our suite of recession models show that the probability of a near-term recession remains low. But we have learned from prior episodes that these models will adjust rapidly, suggesting it is important to continue to monitor the signals.”

Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.

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