Wednesday, May 1, 2019

Economic weakness in the West?

I noticed that the unemployment rates for two west coast states — Washington state (where I live) and California (the largest state by population) — have shown a noticeable uptick recently. Now state level unemployment rates have large fluctuations. However, the unemployment rate for the West Census Region (defined here) is a bit smoother and is also showing that same turnaround. So I decided to try the dynamic information equilibrium model (DIEM) on it:

This shows the last few months of data rising up a bit over the expected non-recession (dynamic equilibrium) path. I tried a few counterfactual estimates: a free parameter shock (A), a shock with a fixed center date at 2019.7 and other parameters free (B), and a typical magnitude/duration shock with a free center parameter (C).

First, it should be noted that typically the non-equilibrium shocks are underestimated in their magnitude during the leading edge, and then overestimated until the shock center has passed. This is probably the reason for scenarios A and B being small relative to the average size of a recession shock.

Scenario A could potentially be showing us the end of the 2014 mini-boom (that end appears clearly in the WA unemployment rate, but at the end of 2015, not 2019). But the mini-boom shows up clearly in JOLTS hires data (again, here) — which we can look at for the West region. In that data (using the DIEM), it appears to end in mid-2016, far earlier than late-2018/early-2019:

It's not implausible that we're just seeing the end of the mini-boom (which does not appear to have ended for the country as a whole).

The latest JOLTS data also appears to be skirting the bottom edge of the hires data. Scenarios B and C both show what a counterfactual recession would look like that's consistent with the deviation from the DIEM since 2018, but — depending on the shock width — shocks to the hires time series precede shocks to the unemployment rate by about 5 months or so. In this case, the hires data is a bit noisy and just might not see the a shock yet.

More data will be coming out in mid-May that might clarify things a little more. It will be interesting to see the unemployment data that comes out on Friday and whether or not this uptick will start to appear nationally.

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