Aggregate Cost Stickiness in GAAP Financial Statements and Future Unemployment Rate

We examine whether cost stickiness measures can help improve the forecasting performance of several prediction models of future unemployment rate. We document that a one-standard-deviation-higher cost stickiness in recent quarters is followed by a 0.23 to 0.26-percentage-point reduction in unemployment rate in the current and following quarter. Out-of-sample tests show that cost stickiness has incremental predictive power over a comprehensive array of known explanators for unemployment rate. In addition, models incorporating cost stickiness outperform professional macroforecasters, particularly those employed in nonfinancial industries, suggesting that professional forecasters do not fully incorporate the information contained in the cost stickiness measure obtainable from publicly available corporate filings.