This is a repost from Forbes.
Standard indicators point to a coming downturn. However, a new indicator – racial unemployment rate gaps – may also help understand the recession in our near future.
After 11 years of economic expansion, the difference in the unemployment rates between black and white older workers is at historic lows – just 1.1 percentage points apart (details below). This may seem like good news, since black workers usually suffer from higher rates of unemployment than whites. And, while it is indeed good news for racial equity, it is likely temporary. Based on historical patterns, which often best predict the future, not only will racial gaps get worse in the next recession, the next recession will be soon.
Racial jobless gaps are widest at the depth of recessions and narrowest at the peak, right before the economy goes into recession. Now, we see the narrowest differences in joblessness rates by race since the last peak. This indicator MAY be pointing TOWARD a recession.
Of course, predicting the precise time of the next recession is not possible, but the consensus among economists is that we are due: the 11-year economic expansion is one of the longest in U.S. history.
The St. Louis Fed provides a helpful list of the standard leading indicators of a recession:
1. “A big increase in oil prices has preceded nearly every U.S. recession since World War II.”
President Trump tweeted on April 20, “Oil prices are artificially very high! No good and will not be accepted,” as if President Trump could stop the price rise and stop the recession. Brent crude prices increased to $74.62 on April 24th, climbing over 50% in the last year. Increases in gas prices have erased the expected income boost of the tax cut for most families below the median.
This indicator is pointing TOWARD a recession.
2. “Asset prices swelled before the two most recent recessions: stock prices before the dot-com bust in 2000 and housing prices before the financial crisis.”
The Economist’s lead story six months ago was “The Bull Market In Everything.” In April, the Shiller price-earnings ratio measure for the U.S. stock market was about 31. For reference, the PE ratio was about 27 in October 2007 and 44 in December 1999.
This indicator MAY be pointing TOWARD a recession.
3. Inverted interest rates, or when interest on a short-term debt (say, three-month Treasuries) is higher than interest on a long-term debt (say, 10-year Treasuries).
An inverted yield curve, or inversion, has preceeded all recessions since 1960. Long-term interest rates are becoming less “inverty,” which could be good or bad news. It's good news if investors are willing to pay more for long-term debt because expectations about growth and profits are high – what economists say is a “real” economic phenomenon, or because wages and oil prices will drive inflation.
This indicator is pointing AWAY from a recession.
I wish I could tell the over 15 million older workers in the U.S. when the recession will hit so that the half of them with significant retirement assets can time the market and protect their nest egg. But really, the best advice comes from 12-step programs – know what you can control and what you can’t. Ignore all feelings of panic and temptation to control asset prices with market timing – like ignore this essay about the next recession. And keep your wealth diversified: 40-ish percent in stock, 40-ish percent in cash and bonds, and 20 percent-ish in home equity, which is part equity and part consumption (you gotta live somewhere).
As promised, I’d like to share more details supporting my speculation. With my team at the Schwartz Center for Economic Policy Analysis (SCEPA) in the The New School’s economics department, we found that the black/white unemployment gap might become a predictor of downturns.
In the aftermath of the recession in 2003, the black unemployment rate for older workers was 6.8%, 2.9 percentage points greater than the older white unemployment rate of 3.9%. By the time that expansion peaked in December 2007, signaling the start of the Great Recession, unemployment rates dropped to 4.2% for black older workers and 3.3% for white older workers, narrowing the racial jobs gap to 0.9 percentage points. When unemployment increased again in 2011, black older workers’ unemployment rate grew to 10.1%, 3.6 percentage points higher than white older workers at 6.5% - the largest gap in the past 15 years. As of February 2018, almost 11 years since the last round of low unemployment rates, the racial unemployment gap has once again narrowed to a gap of just 1.1 percentage points.
Economic growth shrinks the racial gap in unemployment for a number of reasons. When workers are scarce, employers relax hiring practices that have discriminatory effects. In recessions, the racial unemployment rate gap grows because older black workers lose their jobs faster than older white workers.