Wednesday, July 08, 2009
Payroll Employment: Leading, Lagging or Coincident Recession/Recovery Indicator?
There's been a lot of discussion lately of whether employment is a leading, lagging or coincident indicator of economic recovery.
Without a doubt, Payroll Employment carries substantial weight in the National Bureau of Economic Research (NBER) Business Cycle Dating Committee’s demarcation of cycle peaks and troughs; that payroll employment factors so significantly in the NBER’s decision process muddies the waters.
In the current recession, the decline in employment was so substantial and prolonged that it, along with Industrial Production, formed the foundation for the Committee’s judgment, making both of these series coincident indicators for the current recession beginning in January 2007 (Chart 1).
Chart 1.
The NBER Business Cycle Dating Committee "maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions." The NBER Committee defines a recession as:
The Committee goes on to say:
In these statements, the Committee makes clear what it believes constitutes a recession or recovery, and what measures of economic activity it considers crucial to identifying significant downturns and upswings in the U.S. economy.
In identifying the current recession, the Committee stated in its December 1, 2008 announcement:
Based on the payroll employment data, the Federal Reserve Board’s Index of Industrial Production and other economic indicators:
Of course, the Committee uses a number of indicators, any one of which could be dominant at any given time. So, in the past, other economic indicators may have taken prominence as coincident indicators of recession. One of these candidates is the Federal Reserve Board’s Capacity Utilization Index, which measures the percentage of estimated total capacity of U.S. domestic industries utilized in production. What is striking about this index is that, at least since 1967, its decline tends to uniformly lead NBER designated recessions, but its upswings are coincident with recoveries (Chart 2).
Chart 2.
Of interest currently is that the Total Industry Capacity Utilization rate -- at 68.3% for May -- is at its lowest point of any recession since 1967. (For manufacturing, it is an even lower 65.1%.)
As for employment, its behavior in recent recessions and recoveries is as a coincident indicator, not uniformly lagging as is popularly assumed. This divergence between fact and popular opinion is reminiscent of the commonly definition of recession as two successive quarterly declines in real GDP. Nothing could be farther from the truth. --GAHsr, GAHjr
Without a doubt, Payroll Employment carries substantial weight in the National Bureau of Economic Research (NBER) Business Cycle Dating Committee’s demarcation of cycle peaks and troughs; that payroll employment factors so significantly in the NBER’s decision process muddies the waters.
In the current recession, the decline in employment was so substantial and prolonged that it, along with Industrial Production, formed the foundation for the Committee’s judgment, making both of these series coincident indicators for the current recession beginning in January 2007 (Chart 1).
Chart 1.
The NBER Business Cycle Dating Committee "maintains a chronology of the beginning and ending dates (months and quarters) of U.S. recessions." The NBER Committee defines a recession as:
"a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough. Between trough and peak, the economy is in an expansion."
The Committee goes on to say:
Because a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity." [Emphasis added.]
In these statements, the Committee makes clear what it believes constitutes a recession or recovery, and what measures of economic activity it considers crucial to identifying significant downturns and upswings in the U.S. economy.
In identifying the current recession, the Committee stated in its December 1, 2008 announcement:
"The committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment. This series reached a peak in December 2007 and has declined every month since then."
Based on the payroll employment data, the Federal Reserve Board’s Index of Industrial Production and other economic indicators:
"The committee identified December 2007 as the peak month, after determining that the subsequent decline in economic activity was large enough to qualify as a recession."
Of course, the Committee uses a number of indicators, any one of which could be dominant at any given time. So, in the past, other economic indicators may have taken prominence as coincident indicators of recession. One of these candidates is the Federal Reserve Board’s Capacity Utilization Index, which measures the percentage of estimated total capacity of U.S. domestic industries utilized in production. What is striking about this index is that, at least since 1967, its decline tends to uniformly lead NBER designated recessions, but its upswings are coincident with recoveries (Chart 2).
Chart 2.
Of interest currently is that the Total Industry Capacity Utilization rate -- at 68.3% for May -- is at its lowest point of any recession since 1967. (For manufacturing, it is an even lower 65.1%.)
As for employment, its behavior in recent recessions and recoveries is as a coincident indicator, not uniformly lagging as is popularly assumed. This divergence between fact and popular opinion is reminiscent of the commonly definition of recession as two successive quarterly declines in real GDP. Nothing could be farther from the truth. --GAHsr, GAHjr
