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Monday, May 4, 2009

Unemployment Initial Claims Peak Predicts Recession End

Over the weekend, I read a very interesting article by world renown macroeconomist Bob Gordon. Gordon documents a tight correlation between the GDP contraction tough and the final peak in unemployment claims for a recessionary cycle. Accordingly a return to growth for the US economy is just around the corner.

According to Gordon: "In four of the past five recessions the new claims peak leads the NBER weekly trough by a range of only four to six weeks, and in the fifth recession the new claims peak lags the NBER weekly trough by two weeks. Since new claims have recently reached a peak in the week ending 4 April 2009, it is tempting to conclude that the monthly trough of the US recession could come as early as the middle of May 2009 – a date earlier than most analysts appear to expect."

Gordon presents the following charts:

Many bears will claim that the current peak in initial claims is "false." But Gordon argues that "For the peak of 4 April 2009 to be false by historical precedent, the ultimate future peak would have to be in the range of 730,000 to 800,000. As the weeks go by, such a sharp future increase in new claims looks increasingly implausible."

His bottom line: "reasoning leads me to conclude that the ultimate NBER trough of the current business cycle is likely to occur in May or June 2009, substantially earlier than is currently predicted by many professional forecasters."

(Thanks to reader Michael for the tip)

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