Monday, February 12, 2018

Economic seismograms: labor and financial markets

Steve Randy Waldman wrote a tweet asking about whether the stock market falls imperfectly predicted recessions or caused them, to which I responded saying the former in the "Phillips curve era" and the latter in the "asset bubble era" (both described here). But I thought I'd show a dynamic information equilibrium history chart that helps illustrate this a bit better for the US data. I first started making these graphs a few months ago partially inspired by this 85 foot long infographic from the 1930s; I thought they provided a simpler representation of the important takeaways from the dynamic information equilibrium models (presentation here or see also my paper) that I plan on using in my next book. Be sure to click on the graphics to expand them.

The light orange bars are NBER recessions. The darker orange bars represent the "negative" shocks (in the sense that you'd consider a bad change in the measure — unemployment rate goes up or the stock market goes down) with the wider ones meaning a longer duration shock. The blue bars are "positive" shocks (unemployment rate goes down, stock market goes up). The models shown here are the S&P 500, unemployment rate, JOLTS (quits, openings, hires), and prime age Civilian Labor Force participation rate

As you can see in the top graph, major shocks to the S&P 500 precede recessions (and unemployment shocks) in the Phillips curve era (the 1960s to roughly the 1980s) and are basically concurrent with recessions (and unemployment shocks) in the asset bubble era (late 90s to the present).

At the bottom of this post, I focused in on the latter five labor market  measures. This graph illustrates the potential "leading indicators" in the JOLTS data with hires coming first, openings second, and quits third. I don't know if the order is fixed (if there is a recession coming up, openings appears to be leading a bit more than hires). The other interesting piece is that shocks (in both directions [1]) to prime age CLF participation lag shocks to unemployment. There's an intuitive "story" behind this: people become unemployed, search for awhile, and then leave the labor force.

PS I thought I'd include these measures that illustrate my contention that the "great inflation" of the 1970s was primarily a demographic phenomenon of women entering the workforce that I describe here in order to have a single post to reference for some of my more outside the mainstream conjectures. I present two measures of inflation (CPI and PCE) as well as the civilian labor force (total size) alongside the employment population ratio for men and women.



[1] You may be asking why there's a positive shock to unemployment, but no (apparent) shock to any of the JOLTS measures. That's an excellent question. The answer probably lies in the fact that shocks to unemployment are made up of a combination of smaller shocks to the other measures as well as a shock to the matching function itself. Therefore the shock to hires and openings might be too small to see in those (much noisier) measures. One way to think about it is that the unemployment rate is a sensitive detector of changes in both hires, openings, and the matching function.

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