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Lagging indicators of economic activity are given the least attention by the media. Lagging indicators are those that turn consistently after turns in business-cycle activity. For example, a lagging indicator will reach its peak after the business cycle has peaked (i.e. after a recession has begun) and will reach its trough after the business cycle has reached its trough (i.e. after an expansion has begun).
Analyzing cyclical turns in lagging series is useful for confirming turns in business activity. If the coincident indicators we follow are deteriorating (as they have been showing signs of in recent months), but the laggers continued to increase, this would raise doubt that a cyclical contraction of business activity had begun.
The average duration of unemployment is one of AIER’s six lagging indicators. It reflects the average length of time, in weeks, that unemployed persons have been looking for work or, for persons who have been laid off, the time since termination of their most recent employment. Since unemployment duration is highest during recessions and lowest during expansions, we invert the series in our analyses.
As recessions get underway, unemployment increases and hiring slows, both of which tend to increase unemployment duration (though a sudden mass of layoffs could decrease duration due to the large influx of newly unemployed workers).
What does this series signal about the current business cycle?
With respect to the 2001 business cycle peak:
- The series reached a cyclical peak in April 2001, one month after the 2001 recession began;
- The series reached a cyclical trough in May 2004, 30 months beyond the trough of the business cycle.
The long lag between the trough of the prior business cycle and the trough in unemployment duration is one reason the early period in the current expansion has been referred to as a “jobless recovery.”
With respect to the 1990 business cycle peak:
- The series reached a cyclical peak in August 1989, 11 months before the prior recession began;
- The series reached a cyclical trough in May 1994, 38 months after the trough of the business cycle.
This is only one of 24 series that AIER follows. But what do recent changes in the unemployment duration tell us about the current business cycle? The series possibly reached a cyclical peak of 16.2 weeks during November of 2006. If this business cycle resembles the 1990-91 recession, this alone suggests that we might already be in the midst of recession. Though the series has deteriorated somewhat in recent months, its cyclical trough is not yet apparent – again indicating that deteriorating economic conditions may not yet be behind us.
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