A new paper from the Federal Reserve Bank of San Francisco suggests that a single unemployment rate might be inadequate for the labor market’s health. However, a proffered existing group of metrics shows current conditions that have “frequently occurred during the onset of recessions.”
Author research associate Greeshma Avaradi, research advisor Marianna Kudlyak, research associate Brandon Miskanic, and research advisor David Wiczer explain the importance of the flows of people across the states of employment, unemployment, and being out of the labor force (OLF, meaning neither currently working nor looking for work). Because there are three different states, there are six different transition rates. The rates among the states determine changes in the unemployment rate.
The movement of people from being unemployed to being employed is called the job-finding rate, and the length of time people stay unemployed is the unemployment duration. These two are critical at the moment. The researchers found that the recent increase in unemployment is due to a fall in the job-finding rate. That isn’t an issue of temporary layoffs, as happened during the pandemic recession and resulted in a swift recovery when people regained their positions. There is no job waiting for them now.
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At the same time, the duration of unemployment has increased. The relationship is like having a bucket of unemployment. People who lose a job stay in the bucket for a longer period, and the movement out of the unemployment bucket, either to employment or to OLF status, has slowed. The bucket fills faster.
Between the two factors, unemployment has increased. “In the past, such patterns frequently occurred during the onset of recessions, suggesting that these developments could be signs of rising recession risk,” the researchers wrote. “Although the size of the recent increase in unemployment remains relatively small compared with past onsets, the recent data trends warrant close monitoring for potential signs of rising recession risk.”
At a business journalism conference in early April, Federal Reserve Chair Jerome Powell said, “The limited hard data are consistent with a slower but still solid growth outlook. At the same time, surveys of households and businesses report dimming expectations and higher uncertainty about the outlook.” In the latest earnings call for JPMorgan Chase, CEO Jamie Dimon said the bank currently estimates the chance of a recession to be about 50%.
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