How Will We Know When the Recession is Over?

So the recession keeps rolling along. At this point it's not so much about the credit problem, I don't think, but rather the layoffs and resulting unemployment. I think this is typically the case in recessions. Something happens to trigger the initial recession (an "exogenous shock") and then it takes on a life of its own, the proverbial "self-fulfilling prophesy."

A key indicator for the end of recessions appears to be the rate at which unemployment is getting worse. As soon job losses peak, i.e., job losses are getting worse but at a significantly less-bad rate, that signals that the end of the recession is near. Economists track this with the four-week moving average of initial unemployment claims. Once that moving average dips significantly, they're saying somewhere in the 20,000-40,000 range for this recession (right now it's above 650,000 total), then you've got your signal.

BTW, as soon as Wall Street sees/believes this you can expect the stock market to take off like a rocket. The stock market is all about future expectations and this will be huge shift upwards in future expectations.

Below is a chart and also a link to a blog entry and supporting articles on the topic. This chart shows the four-week average of initial unemployment claims going back to 1971. The greyish-blue areas on the chart show the recessions. You can see very clearly how the peak occurs and then shortly thereafter the recession ends.



Calculated Risk: End of Recessions and Unemployment Claims