So much for jobs being a lagging indictor. Economists at Goldman Sachs have constructed a handy little model for predicting recessions based on increases in the unemployment rate. We’ll let them explain the details in their own words, but here’s the short of it: If the jobless rate ticks up to 9.3 percent in July from 9.2 percent in June, then stays there in August, the U.S. expansion is toast:
Technically, the “rule” is as follows: if the three-month average of the unrounded unemployment rate increases by more than three-tenths of a percentage point (35 basis points to be exact) from a trough, the economy has either entered recession already, or will do so within six months. The intuition behind this statistical regularity is that if the labor market stalls for more than a short period, a vicious cycle of weaker income growth, weaker spending, and weaker hiring typically results. An important exception is in the early phase of economic recovery, when the unemployment rate often continues to drift higher for several months. Currently, the three-month average rate is 9.07%, up from a recent trough of 8.90% in April. The unemployment rate would need to increase to 9.3% in July and stay there in August to trip the 35-basis point threshold; our forecast for Friday’s July labor market report is that the unemployment rate will remain steady at 9.2%.