Official recession calls are the responsibility of the NBER Business Cycle Dating Committee, which is understandably vague about the specific indicators on which it bases its 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 recession indicators that the committee weighs heavily in their cycle identification process. They are:
- Nonfarm employment
- Industrial Production
- Real Retail Sales
- Real Personal Income (excluding Transfer Receipts)
The Latest Indicator Data: Nonfarm Employment
September saw a 254,000 increase in total nonfarm payrolls and the unemployment fell to 4.1%. The forecast was for 147,000 jobs gained and for the unemployment rate to remain at 4.2%.
The chart below shows the monthly percent change in this indicator since the turn of the century, a period that includes three recessions. We've included a 12-month moving average to help visualize the trend.
Nonfarm Employees: Visualizing the Data
There are many ways to plot employment. The one referenced by the Federal Reserve researchers as one of the NBER indicators is total non-farm employees (PAYEMS). In the charts below we have illustrated three different data manipulations:
- A log scale plotting of the complete data series to ensure that distances on the vertical axis reflect true relative growth. This adjustment is particularly important for data series that have changed significantly over time.
- A year-over-year representation to help, among other things, identify broader trends over the years. Nonfarm employment year-over-year is currently at or below the level at the start of 8 of the 13 recessions that have started since 1940.
- A percent-off-high manipulation, which is particularly useful for better understanding of trend behavior and secular volatility. Nonfarm employment is currently at an all-time high.
Nonfarm Employment: The Problem of Revisions
At first glance, 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 undergo multiple revisions. The initial monthly estimate is subject to a first and second revisions, subsequent benchmark revisions and annual revisions that stretch back many 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.
Nonfarm Employment: The Problem of Population Growth
Another problem with the non-farm 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 dividing the non-farm employment (FRED series PAYEMS) by the civilian labor force age 16 and over (FRED series CLF16OV). The current level of 94.31% is just below the all-time high for the series reached in May 2024 (94.45%).
Read more for an in-depth analysis of our four big recession indicators which incorporates the latest employment data.
