The econometric evidence continues to mount that May wasn’t the start of a new recession in the US. The latest clue is yesterday’s monthly update of the Federal Reserve’s Labor Market Conditions Index (LMCI), which is designed as a “dynamic factor model that extracts the primary common variation from 19 labor market indicators.” Last month’s reading ticked up to a modestly positive value—1.3—for the first time since February. Running the numbers through a probit model quantifies what casual observation suggests: recession risk was low as of last month.
Estimating the state of the business cycle with a single data set is hardly definitive, even when the focus is on a key factor such as the labor market. But when a routine review of indicators from across the spectrum also shows a bias in favor of growth (see here, here, and here, for instance), it’s advisable to align your view with the broad message in the numbers.
Granted, LMCI’s current level looks unimpressive by historical standards. Although the index returned to positive terrain last month, the 1.3 reading for May remains close to a three-year low, which suggests that the labor market’s growth is still quite a bit softer than casual observation suggests by way of the unexpectedly strong gain in payrolls in May.
But in the search for binary signals in the dark art of estimating recession risk in real time, LMCI’s message is clear when we run the numbers through a probit model that analyzes this indicator in context with NBER’s recession dates. In other words, the odds are virtually nil that NBER will declare May as a recessionary month.
This could change, of course, depending on how May’s economic profile evolves in the weeks ahead. Retail sales for last month, for instance, are due later this week (Thursday, June 11), although the consensus forecast is looking for a solid gain after a mild decline in April, according to Econoday.com.
In any case, the future’s uncertain as always… but the recent past is reasonably clear. Based on what we know today, the warning in some circles that the US is slipping into another recession still amounts to a speculative call that’s informed by emotion and/or guesswork rather than hard data.