{"id":57933,"date":"2023-09-07T04:25:38","date_gmt":"2023-09-07T08:25:38","guid":{"rendered":"https:\/\/ifintechworld.com\/news\/unemployment-rate-just-signaled-a-recession-may-occur-within-6-months-nysearcaspy\/"},"modified":"2023-09-07T04:25:45","modified_gmt":"2023-09-07T08:25:45","slug":"unemployment-rate-just-signaled-a-recession-may-occur-within-6-months-nysearcaspy","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=57933","title":{"rendered":"Unemployment Rate Just Signaled A Recession May Occur Within 6 Months (NYSEARCA:SPY)"},"content":{"rendered":"
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I hope everyone had a great Labor Day weekend!<\/p>\n

Let’s jump right into this week’s newsletter.<\/p>\n

On Friday of last week, the US economic releases contained two of the more important monthly releases – 1) the Change in Nonfarm Payrolls and 2) the Unemployment Rate.<\/span><\/p>\n

The Change in Nonfarm Payrolls came in at 187k vs. expectations of 170k while the Unemployment Rate came in at 3.8% vs. expectations of 3.5%.<\/p>\n

The Nonfarm Payrolls number was 17k better than expected but the previous month was revised down by -30k to 157k. However, when you look at the Nonfarm Payrolls over a two-month period it was largely in line with expectations so not ultra-newsworthy in my opinion.<\/p>\n

Unemployment Rate – What is it telling us?<\/strong><\/h2>\n

Where I’d like to focus today is on the Unemployment Rate of 3.8%. This was the highest Unemployment Rate since February 2022 which was also 3.8%. The reality of the situation is that a 3.8% Unemployment Rate is still indicative of a very healthy economy.<\/span><\/p>\n

With that said, the “issue” isn’t the 3.8% Unemployment Rate itself, but instead, the change in the number and specifically, where the current 3.8% is relative to its 18-month moving average.<\/p>\n

In the chart below, I have graphed the Unemployment Rate (blue line) vs. its 18-month moving average (green line). The red vertical bars denote US recessions.<\/p>\n

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\"Unemployment<\/span><\/picture>
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TradingView<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

If you examine the chart closely, you’ll notice that each time the Unemployment Rate has had a sustained move “up and through” its 18-month moving average, we have had a recession begin within the next three quarters. I have highlighted these occurrences with yellow circles.<\/p>\n

Further, I have added vertical black dashed lines which denote when the Unemployment Rate moved “up and through” its 18-month moving average. If we look at these vertical black lines relative to the start of the subsequent recession, we find that there really isn’t a consistent time interval between the “warning signal” (i.e., the Unemployment Rate moving “up and through” its moving average) and the start of the next recession.<\/p>\n

The range of outcomes over the course of the previous 8 recessions is anywhere from 0 months to 9 months of “advanced notice” with an average of 3.25 months and a median of 3.00 months.<\/p>\n

It is worth noting that there have been a couple of instances where the Unemployment Rate moved above the 18-month moving average, fell back below the 18-month moving average, and then moved above it again. For my calculations, I used the first time the Unemployment Rate moved above its 18-month moving average to measure the timespan until the next recession.<\/p>\n

Where are we today?<\/strong><\/h2>\n

The Unemployment Rate first moved above its 18-month moving average 3 months ago with the 3.7% print in May of this year. We subsequently moved back below the 18-month moving average and we’re now back above it again.<\/p>\n

By historical standards, we are effectively at the average\/median time frame of 3.25\/3.00 months which would suggest that a recession could be imminent. Alternatively, if we were to use the 9-month maximum timespan figure noted above, it would suggest that a recession could still be 6 months away or maybe something truly is different this time and we won’t have a recession at all. Only time will tell.<\/p>\n

It’s important to remember that no one rings a bell and tells us that a recession has begun. The National Bureau of Economic Research (NBER) is responsible for determining when a recession begins\/ends and they often make this determination well after the recession has begun and sometimes even after the recession has already ended.<\/p>\n

The classic example was when the NBER came out in December of 2008 and told us that the US was in a recession and that the recession began in December 2007. For those of us who lived through the “Global Financial Crisis”, it was painfully obvious that the US was in a recession well before the NBER declared it so in December 2008.<\/p>\n

My point here is that we shouldn’t wait for the NBER to tell us that we’re in a recession, the market has a way of doing that for us well before the NBER and I’m suggesting that using the Unemployment Rate vs. its 18-month moving average is a good tool to have in your toolkit towards this end.<\/p>\n

In the following charts, I’m going to go back and zoom in on the previous eight recessions so that we can get a sense for what the market was telling us, and when, relative to where the Unemployment Rate crossed “up and through” its 18-month moving average.<\/p>\n

Let’s start with a table that summarizes the results and then we’ll move into the charts.<\/p>\n

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\"Data<\/span><\/picture>
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Author Created<\/p>\n<\/figcaption><\/figure>\n<\/p>\n

In the following charts, please note the following:<\/p>\n