The February jobs report marked the second month in a row where the headline unemployment number was below 5 percent. The last time that happened was October and November of 2007. Jobs data also suggest the economy is ready to pick up steam, with 242,000 added in February.
Nonetheless, other key indicators point to a downturn. While recessions are difficult to predict, four variables can help policymakers determine if we’re getting ready for a late-2007 repeat, or if our economy is fundamentally stronger today.
The first variable to consider is corporate profits. They peaked at $362 billion in the second quarter of 2015 and fell 2.5 percent in the third quarter of 2015, the latest data available. By comparison, in the fourth quarter of 2007, corporate profits had already fallen 14 percent from their peak. It will be troubling if corporate profits fell again in the fourth quarter of 2015, but this is a distinct possibility given anemic GDP growth in that quarter. It will be especially concerning if they fall again in the first quarter of 2016; a string of three straight quarterly declines has not happened since the previous recession in the early 2000s.
The next variable to examine is the Industrial Production Index, which measures real output for manufacturing, mining, and electric and gas utilities; it's one of the variables the National Bureau of Economic Research’s Business Cycle Dating Committee uses to judge the health of the economy. This variable peaked before the last recession in November 2007 — and as of January, it stands below its new peak of December 2014. By this measure, the manufacturing sector of the U.S. economy is likely in recession.
How about employment? The best measure is the employment-to-population ratio of prime-age (25-54) workers, a variable Nobel laureate Paul Krugman called his “favorite gauge of the jobs picture.” This variable is an important measure because it is unlikely to be swayed by people staying in school longer or retiring earlier. As of February 2016, 77.8 percent of prime-age Americans are employed, an improvement of 3 percentage points from the low point in November 2010. However, it is still 1.9 percentage points below the November 2007 number. By this measure, the recovery in the labor market has been disappointing.
Finally, there's growth in wages — which has been lackluster. The year-over-year gain in average hourly earnings of all employees in February 2016 was 2.2 percent. While it's good that wages are finally starting to show growth after five years of stagnation, year-over-year wage growth in November 2007 was 3.07 percent. Workers are feeling the pinch on the employment and the wage side.
Taken together, these variables give us a picture of an economy not yet on the brink of recession, but too weak to absorb a significant shock. The declines in corporate profits and manufacturing output are modest right now, but concerning nonetheless. Employment is improving, albeit at a frustratingly slow pace. Wages are finally growing too, but still at a slower rate than they grew the last time unemployment was this low.
In a global economic environment that seems poised to offer bad news — whether it’s falling commodity prices, sluggish growth in Europe, or turmoil in Chinese markets — policymakers, including our next president, need to be alert.
Jared Pincin is an assistant professor of Economics and Brian Brenberg is chair of the Business and Finance Program at The King's College in New York City.