One of the best indicators of the health of the economy from the last several years has been the strength of the labor market. In particular, low unemployment and jobless claims have highlighted a tight labor market traditionally associated with a strong economy. However, what if the opposite was the case? Recent academic studies show a new recession indicator: full employment. Historically, downturns have typically started about 12 months following the lowest unemployment rate reached in a cycle.
FINSUM: We are currently at 3.7% unemployment, which is VERY low. It seems like the economy is exactly in the “12 months from a recession” position, at least according to this research.
There have been a lot of recession indicators lately—the yield curve, slowing growth, the end of the tax cut boost. However, one that really catches the eye this week is GM’s massive job cuts. The company is shedding over 14,000 jobs across many states, including in Michigan, Maryland, and elsewhere. The cuts amount to 15% of its work force. The move comes in response to slowing sales and changing tastes. All of the plants being closed make parts for passenger cars, not the SUVs that have become much more popular with buyers.
FINSUM: This could either be the canary in the coalmine, or it could be a response to the very specific automation pressures that are hitting the car market.
Investors get ready, because it looks like the next recession is on the horizon and the Fed is set to start it. And we are not talking about a distant horizon. The Fed has now made its goal a task that has been nearly impossible historically. That is to boost the unemployment rate without causing a recession. The odds of failure are very high and the Fed has never successfully achieved it in its history. The reason the Fed wants to boost unemployment is that labor markets are very tight, which will produce unacceptably high inflation. Accordingly the Fed must intentionally walk up the unemployment rate to keep things in check. The tool it will use is gradual rate rises to slow down growth and boost unemployment.
FINSUM: We think the Fed is probably going to fail in this exercise, either by being too dovish and letting inflation get too high, or by being overly hawkish. Either way we do not see a good outcome. This cycle might have just crested.