Recession indicator: labor market in classic downturn pattern

The U.S. economy added 142,000 recent jobs last month, below forecasts, while the unemployment rate fell to 4.2%.

A complete of 118,000 recent employees were hired within the private sector, however the three-month moving average fell below 100,000. According to analysts at Citi Research led by US chief economist Andrew Hollenhorst, these are the weakest three months for the private sector since 2012, excluding the pandemic.

Meanwhile, the unemployment rate has risen by almost a full percentage point from its low, he added in an announcement on Friday, declaring that layoffs that were once considered temporary have now turn into the norm.

“The conclusion from the labor market data is clear: the labor market is cooling in a classic pattern that precedes a recession,” he wrote.

In a follow-up commentary on Friday, Hollenhorst and his team focused more on the three-month average of personal sector employment gains, which had fallen below 100,000, saying such a pace is normally only seen around recessions.

Even more worrying, revisions to previous jobs reports suggested that wage growth was overstated by as much as 70,000 jobs monthly.

“The data released this week have made us more confident that the U.S. economy is heading for at least a significant slowdown (and more likely a recession). However, it is still unclear exactly how the Fed will respond to the deteriorating outlook,” he said, adding that Citibank expects a 125 basis point rate cut this yr.

Other signs of an economic downturn include a decline in auto sales and a reluctance to purchase homes, which remain subdued despite the recent decline in mortgage rates, the statement said.

Hollenhorst has been relatively contrarian this yr, maintaining his gloomy assessment of the economy whilst Wall Street was widely expecting a soft landing.

In July, he predicted the Fed would cut rates of interest by 200 basis points by mid-2025 because the economy heads for a deeper downturn. In May, he reiterated his warning that the U.S. was headed for a tough landing and that Fed rate cuts wouldn’t be enough to forestall it. He had previously made an analogous forecast in February, even within the face of underwhelming jobs reports.

Certainly, people usually are not yet back to the concept of ​​a recession, as economists point to low unemployment, robust corporate profits, strong GDP numbers and estimates, positive retail sales and rising wages.

But elsewhere on Wall Street, analysts have identified other recession indicators which are now raising alarm. On Friday, Jose Torres, senior economist at Interactive Brokers, identified that the The yield curve has invertedwhich has preceded every recession since 1976.

An inversion – where short-term returns exceed long-term returns – is taken into account a reliable recession indicator since it signals that investors expect higher risk within the near future.

Until recently, yields had been inverted for about two years, however the regression in yields doesn’t mean that the economy is out of the woods.

“In fact, historically, an economic downturn has been preceded by a positive spread across 2- and 10-year Treasury bonds after a long period of negative differentials,” Torres warned.