‘Animal spirits’ update

In spite of the downtick in the unemployment rate—due to lowered labor force participation—the topping process in “animal spirits” continues; there was no break of the recent high.

As the history of the A metric shows, when it crosses the zero line from above a collapse of confidence is virtually guaranteed.

When will we get there?  Frequently entry into NBER-defined recession precedes the crossing of the zero line, so my forecast of a collapse of confidence before the end of year may be plausible.  Otherwise it will occur in 2014.  With job growth (especially full-time, “good” job growth) at the pathetic levels it’s at, it’s hard to see how a collapse of confidence before the actually crossing of the zero line won’t take place.

Here’s a close up of my judgmental unemployment rate forecast and its attendant adaptation level forecast:

Sooner or later a lot of the unemployed are going to have to start looking for work, and that will push the unemployment rate up, precipitating the collapse of confidence as the published unemployment rate rises.

I have taken a brief look at whether coming within a “just noticeable difference” of the adaptation level is sufficient to cause the collapse, and I don’t think it is.  Confidence is especially sensitive to the A metric actually attaining a negative value.  However, as can be seen from the history, in many cases the NBER-defined recession occurs before that happens.