What is macro telling us about the likelihood of a recession?

First sign of trouble in the jobs market

Some people think the Federal Reserve is going to nail the soft landing. Not us. 

For one, they don’t have a good track record for these kinds of things.

And also there is a sign we might be entering the late stage before the US economy is in a bona fide recession. Let’s see what this sign is and why it is worth paying attention to it.

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What is macro telling us about the likelihood of a recession?

The takeaway

The unemployment rate isn’t a great predictor of the future strength of the US economy. 

If there is one thing we have learned from looking at past recessions it is this one. When the economy is at the point where the job market deteriorates then it is already too late. You are already in a recession.

And it isn’t a very deep observation either. I can show it to you in one chart:

• You have all the recession since 1948, one per panel.

• The monthly print of the unemployment rate is in red.

• When you get in the blue zone, you are in a recession as defined by the NBER.

The lesson is, when the unemployment rate is doing its hockey stick pattern, it is already too late.

So please ignore everyone who tells you that there is nothing to worry about because the job market looks good. It simply doesn’t mean anything. 

And on top of that, the job market is actually on its way to turn bad with a key job indicator falling below its long term trend.

There is no way of knowing how bad the recession will be, but there is a good likelihood we are heading into one. 

So let’s review what is this recession bet, why is it taking so long to play out, and what indicator to look for in order to see what’s coming next.