In yesterday’s newsletter, we explored various assessments of the nation’s economic condition, noting that Washington voters remain relatively confident. So far, state tax collections bolster that confidence. But,
Nationally, the economic news is mixed. The National Association of Business Economists’ latest survey reports 74 percent of its members foresee a recession by the end of 2021. Yet, despite some recent fluctuation, consumer and small business optimism remains high. Even that NABE survey is a slightly more upbeat assessment than reported in February. Besides, FiveThirtyEight reports that “economists are bad at predicting recessions.”
Now comes an interesting analysis from Stateline, a Pew publication.
Since 1970, when the unemployment rate rises at least a half a percentage point above its lowest point over the previous 12 months, the national economy is almost always — 97% of the time — in a recession, according to a recent report by Claudia Sahm, an economist at the Federal Reserve.
The Brookings Institution applied the Sahm standard to instances when the U.S. unemployment rate goes up by at least 0.4 percentage points and found that there is a 76% chance that a recession has arrived.
The relationship between unemployment and recession is more complicated at the state level, however. Nevertheless, several states may be straying into dangerous territory.
We know that state economies vary, sometimes dramatically. So the notion that some states are prospering while others languish is not surprising. Here in Washington, as we’ve written, our state economy has typically performed better than the nation as a whole and much better than some states. Back to Stateline:
…there is a 50% chance that Minnesota and North Carolina are currently in a recession. It’s not yet possible to confirm that, however, because state GDP numbers are only available through the first quarter of 2019.
The disconnect between unemployment and GDP in another state, Colorado, illustrates the uncertainty: Colorado’s unemployment rate has risen several times in the last year, but GDP figures show its economy did not contract at those times.
The most recent state recessions, in late 2017 and early 2018, occurred in Alaska, Delaware, New Mexico and West Virginia.
The article goes on to examine the uncertainty associated with the unemployment gauge. Clearly, it’s an imperfect predictor of recession, though a useful guide for policymakers. And there’s no arguing with this conclusion:
Michael Belsky, director of the Center for Municipal Finance at the University of Chicago, said states should start thinking ahead when their unemployment rate rises. Prudent preparation might include building up reserves, “stress tests” to plan for dramatic drops in revenue and some preliminary cost-cutting.
“One of the biggest sources of revenue for states is income tax and sales tax, and when people are unemployed that’s not coming in,” Belsky said. “You have to plan for that, so you’re not shocked into making across-the-board cuts that can hurt your chances of coming back.”
We’d argue you be wise to plan for the downturn well before it hits. And, in that regard, we have some new information about the national economy.
Calculated Risk again looks at economic forecasts and concludes:
These early estimates suggest real GDP growth will be around 2% annualized in Q3.
That’s still grown, of course, but slowing. And the Associated Press reports the consumer confidence, a key indicator, has begun to contract again, though remains relatively high.
The Conference Board, a business research group, said Tuesday that its consumer confidence index edged down to 135.1 in August, slightly below a July reading of 135.8, which had been the highest since November. Economists had been looking for a bigger drop in August.
The reading on consumers’ assessment of current conditions improved and now stands at its highest level in nearly 19 years.
…Lynn Franco, senior economic director at the Conference Board, said, “If the recent escalation in trade and tariff tensions persists, it could potentially dampen consumers’ optimism regarding the short-term economic outlook.”