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posted on 25 July 2016

Is Rising Unemployment An Early Warning Of State-Level Recession?

from the Dallas Fed

-- this post authored by Alan Armen and Tyler Atkinson

Based on experience with national unemployment, analysts have viewed sharply higher state joblessness as signaling possible further deterioration. However, analyses indicate increasing state-level unemployment by itself does not indicate a recession, and that applying rule-of-thumb properties regarding recession to state economies is misguided.

nemployment rates increased sharply in several states during 2014 - 15. Analysts and policymakers wondered if these increases signaled imminent state-level recessions - or in other words, contracting economies - despite the national unemployment rate trending downward.

Motivating the concern is that an increase in the U.S. unemployment rate's three-month moving average of more than 0.33 percentage points above recent lows has signaled every postwar recession, with only a few false signals.1 If a state's unemployment rate rises 0.4 percentage points, does this imply imminent state-level recession?

The answer, it appears, is "not necessarily." Moreover, it is unclear whether the concept of recession at the state level is a useful way to think about local economy slowdowns. State-specific downturns are typically smaller and of shorter duration and do not exhibit a snowball effect - where small increases in unemployment are inevitably followed by larger ones. Instead, they tend to be symmetric variations around the national trend, where the downturns are no more pronounced than the upswings.

[click on image below to continue reading]

Source: http://www.dallasfed.org/ assets/ documents/ research/ eclett/ 2016/ el1608.pdf

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