Despite the recent spate of better-than-expected economic data, employment in the United States economy continued to shrink in May, indicating that a recession is still on the cards.
Last week, reports from the Institute for Supply Management (ISM) showed that economic activity held up relatively well in May.
The ISM's manufacturing PMI rose to 49.6 in May from 48.6 in April. This indicates that manufacturing activity was essentially flat, an improvement over the contraction in previous months when the index was well below 50.
The ISM's non-manufacturing index fell to 51.7 from 52.0. This indicates that non-manufacturing activity continues to expand, albeit at a slower rate.
Both indices were better than expected in May. Economists surveyed by Bloomberg had expected the manufacturing index to fall to 48.5 and the non-manufacturing index to fall to 51.0.
Flat manufacturing activity and expansion in non-manufacturing activity together indicate that the US economy on the whole is still expanding.
However, while these data look hopeful, James Hamilton, Professor of Economics at the University of California, San Diego, says that in a recession, things can take a sudden turn for the worse. He wrote recently at the Econbrowser:
... [R]ecessions represent distinct and objectively identifiable episodes in which the usual dynamic factors that drive economic growth -- technological progress, population growth, and capital accumulation -- are replaced by a distinctly different dynamic in which lost income in some sectors feeds back into declines in output for others. One of the defining characteristics of this phenomenon is the rapid rise in the unemployment rate that we've seen in every historical recession.
Unfortunately, a rapid rise in unemployment is exactly what we are seeing.
The separate household survey also showed a large 285,000 fall in employment and, together with a jump in the number of re-entrants and new entrants to the labour force, resulted in the unemployment rate surging to 5.5 percent in May from 5.0 percent in April, the biggest one-month increase in the unemployment rate since 1986.
In other employment-related news last week, the Labor Department reported that the number of initial claims for unemployment insurance benefits fell to 357,000 in the week ended 31 May from 375,000 the week before. This resulted in the four-week average falling to 368,500 from 371,250 in the previous week.
Also showing a decline is the number of continuing claims for unemployment insurance benefits, which fell by 16,000 from a four-year high to 3.093 million in the week ended May 24.
Nevertheless, the longer-term trends for initial and continuing claims, like the trend in the unemployment rate, are clearly up. As clearly as the trend for employment is down. The accompanying charts show that similar deterioration in the employment indicators in the past have almost invariably occurred during or were followed soon after by recessions.
So if history is any guide, a US recession looks likely.