Friday, November 03, 2006

Unemployment Rate vs. Recessions

by Bill McBride on 11/03/2006 10:42:00 PM

In the comments to the previous post, ac suggests we "would expect to see the unemployment rate drop to a new low just prior to a recession". This is historically correct.

Click on graph for larger image.

Historically the unemployment rate has no predictive value. It does not rise right before a recession - in fact it is common for the unemployment rate to set a new low right before a recession starts. Of course, just because the unemployment rate has hit a new low, doesn't mean a recession is imminent either!

The bottom line is the unemployment rate has no predictive value. It is simply a coincident indicator.