Richmond Fed, Report: Unemployment Changes as Recession Indicators

“We have argued that the year-over-year change in the unemployment rate or initial UI claims is a pretty good predictor (based on the AUROC criterion) for the start of a recession in the U.S. economy. We have also argued that including the six-month-lagged 10Y3M Treasury spread significantly improves the performance.”

“Conditional on the current unemployment readings, one can argue that a recession might well be imminent. In the last row of Table 1 above, we display the latest readings from March for our recession indicators. While the unemployment rate remains at record low levels, the recession probability from the probit model that incorporates information on the unemployment rate and lagged term spreads is now close to a critical value consistent with a 10 percent false positive rate. Furthermore, initial UI claims have increased recently, and this increase as well as the recession probabilities from the probit models with UI claims now exceed the critical values consistent with a 10 percent false positive rate.”