“Frequently, in the early stages of recessions or during growth soft-patches, there is not a clear consensus among forecasters as to whether or not a recession is actually occurring,” writes Deutsche Bank economist Carl Riccadonna.
The issue is that economists opposite sides of the argument weight different metrics differently.
But Riccadonna and the economics team at Deutsche Bank have an incredibly reliable indicator of recessions.
They call it the “rule of 10%” and it’s an interpretation of the U.S. weekly initial jobless claims. Riccadonna explains:
Our rule of thumb is as follows: In the past, when jobless claims backed up by 10% or more from the prior quarter’s average, in all but one instance (Q1 1967), the economy was on the brink of recession. Thus, the rule has proven to be fairly reliable over the past several decades.
Here’s his chart showing the record of this indicator:
Photo: Deutsche Bank
So based on the recent quarter’s average jobless claims and the current trend of jobless claims, Riccadonna notes that that “rule of 10%” would suggest we are not heading into recession. In fact, the bar for jobless claims is actually quite high:
Therefore, given that Q1 initial jobless claims averaged 369k, the subsequent backup to 382k in Q2 was troubling—and likely reflective of slowing growth in sequential terms—but it was not the magnitude of move necessary to signal an imminent recession. To meet the aforementioned criterion, we would have needed to see claims exceed 400k. The threshold for the current quarter is higher still—roughly 420k, so we take comfort in the fact that jobless claims appear to be drifting back toward May levels (roughly 375k).
Then again, recent jobs data in general have been quite disappointing. In June, U.S. companies only added 80k jobs.
And Riccadonna recognises the U.S. economy isn’t exactly in the clear.
“Of course, this also supports the notion that July payrolls should not deteriorate significantly from the pattern of the past few months, which is why we are preliminarily forecasting +75k,” writes Riccadonna.
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