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"R.E.W.Ind" - Still Flashing    


 REWIND




Monday, July 7, 2008

By Gibbons Burke

Since this Spring, when talk of the likelihood of a recession was buzzing, economists have backed off of that somewhat - tempering their harsh judgement of the economy. According to our Recession Early Warning Indicator, which we're going to dub REWIND, the lull business activity is still on.

The REWIND indicator is fairly simple, which makes it elegant as well. It measures the life blood of any economy - the ability to keep people working by creating jobs, generating income and revenues and therefore taxes, consuming goods. We take a simple three month (quarterly) net change in the monthly non-farm payroll statistic produced by the Bureau of Labor Statistics2 in their Employment Situation32 report.

The indicator is useful because it uses a current and very timely indicator of the economy's pulse. We don't have to wait for two quarterly GDP releases, whose underlying data is filled with lagging indicators, to know that we've had two quarters of negative GDP growth. This is a much more timely measure of one of the most important aspects of the economy.

This report, usually released on the first Friday of the month for the previous month's data, was released on Thursday instead. It showed that there was a preliminary net loss of 62,000 non-farm payroll jobs in the month of June which makes for a -191,000 net job loss over the last three months, well into REWIND signal territory, which starts when the three-month change in jobs turns negative.

We featured this signal4 when it first occurred back in March, 2008 based on the data for February. Looking back at past recessions on the chart below we can see that the job situation is likely to get worse before it gets better before this contraction cycle is fully played out.

We first used this indicator to call the 2000 recession in September of that year. See the related articles linked below for a look at our use of this indicator in the past.

The stock market seems to be discounting this recession pretty significantly so far.

Gibbons Burke5 is editor of MarketHistory.com.

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