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EMPLOYMENT WATCH  •  December 11, 2023  •  Jon Wolfenbarger

Unemployment Rate Signals A Recession Has Likely Begun

VENICE, ITALY — Jobs growth continues to weaken as the economy heads into a recession, as it slowed from 3.4% in November 2002 and 1.87% in October to 1.8% in November. 

While overall jobs increased 199K and beat expectations by 16K, private cyclical jobs (excluding acyclical government, education and health jobs) increased by only 51K, with 33K of the increase coming from the ending of auto strikes. The prior two months were revised down by 35K, continuing the downward revisions we have seen this year.

Unemployment Rate And The Coming Recession

The unemployment rate fell to 3.7% from 3.9% last month. The unemployment rate is important for the Sahm Rule Recession Indicator, which is one of the simplest and most popular coincident (not leading) recession indicators in economics.

The Sahm Rule Recession Indicator confirms a recession is in progress when the three-month moving average of the national unemployment rate (U3) rises by 0.5% or more from the minimum of the three-month average of the previous 12 months. This is shown in the chart below, with recessions shaded gray.

Historically, this indicator has been triggered about three or four months after a recession has started, partly since the employment report is one month delayed.

The Sahm Rule Recession Indicator is currently at 0.3. That is above the average of 0.19 seen at the beginning of previous recessions, which suggests a recession may have already started. 

This is not surprising to us — but it will be to Wall Street — given the inverted yield curve, declining money supply, declining leading economic indexes and declining leading employment indicators.

Leading Employment Indicators Point To Recession

In addition to the Conference Board Leading Employment Index, which has been declining for 12 straight months, there are several other leading employment indicators that are pointing to recession.

Temporary employment is a leading employment indicator because it is easier to lay off temporary employees than it is full-time employees. As shown below, temporary employment growth is falling at a pace only seen in recessions.

Other leading employment indicators include the number of permanent jobs losers, trucker job losses and the number of job openings. 

The increase in the number of permanent jobs losers is also rising at a rate only seen in recessions, as this chart shows.

This next chart shows the number of truckers is falling at a rate typically seen in recessions.

Job openings fell to 8.7 million this month, down from 9.35 million last month and below expectations of 9.3 million. As this chart shows, the S&P 500 (red line) historically tracks job openings (blue line), but they have disconnected this year due to the narrow “magnificent seven” rally.

Inflation Remains Too High For Fed Rate Cuts

Average wage growth was 4%, double the Fed’s 2% target. The Fed’s favorite inflation gauge, Core PCE inflation, increased 3.5% last month, 1.75 times faster than the Fed’s target. Median PCE inflation — which the Fed believes “can provide a better signal of the underlying inflation trend than either the all-items PCE price index or the PCE price index excluding food and energy (also known as the core PCE price index)” — increased 4.2%, more than double the Fed’s target. 

If we can believe Jay “Transitory Inflation” Powell’s stated comments (which admittedly is a big “if”), he is more focused on bringing inflation down rather than avoiding a recession to secure his “legacy” as an “inflation fighter” (the same inflation he created when he increased the money supply an unprecedented 40% in response to the covid government-imposed lockdowns). 

Thus, the market may be getting ahead of itself in pricing in rate cuts, unless the economy is going into a major recession in 2024, which appears likely to us. 

Recessions and rate cuts have not been bullish for stocks or other risk assets historically, including in the early 2000s or 2008-2009.

Buckle Up For A Hard Landing

The chart below from Bank of America shows the average S&P 500 returns around recessions since 1871. We are currently at the point on the left, as the yield curve is beginning to steepen. Typically credit conditions tighten next and then the Fed cuts rates as they panic over a recession becoming obvious. Then stocks fall significantly. We recommend buckling up for the "hard landing" and roller coaster ride ahead.