After Jobs Report, Economic Recession Might Be Official

Let’s cut to the chase. If you haven’t heard of the Sahm Rule Recession Indicator before now, you will certainly hear about it today and into this weekend. It argues (and it has a good historical track record) that when the three-month moving average of the unemployment rate moves 0.5% higher than the lowest three-month average in the past 12 months, then we are headed for recession. The current three-month average is 4.13%. In August 2023, it was 3.63% — a move of 0.5% (though, to be honest, I’m not sure that counts, since it includes June data which was 13 months ago. But it isn’t really a rule either, so it seems close enough).

The unemployment rate ticked up primarily due to a larger workforce, with a larger participation rate. The household data, which has been weak of late, added 67,000 jobs (only slightly worse than the establishment’s 114,000). More interesting was that it showed a substantial number of full-time jobs gained, with part-time jobs lost, which is the opposite of what it has been showing for much of the last year.

Revisions were down (that has been the trend). The private sector only added 97,000 in jobs, a big chunk of the miss on the headline. I like to focus on private sector jobs as I tend to believe that is more indicative of the economy’s “natural” ability to generate jobs, while government employment tends to have many other factors at work.

Earnings dropped (which a few months ago would have been cheered as less inflation, but now might point to belt tightening) and hours worked dropped — not great for the “no” or “soft” landing crowd. The birth/death adjustment added 246,000 jobs.

I have no problem with attempting to fill in data gaps using estimates. I am sure it is incredibly difficult to figure out how many companies closed or opened for business. Then, trying to figure out how many jobs came or went must be statistically challenging (seems like a job for AI). 

What I don’t like is when we report 97,000 jobs, and 246,000 come from this model. Basically, without the adjustment, we lost 149,000 private sector jobs. Maybe in a slowing economy, where jobs are being lost elsewhere, people are rushing to start businesses to capture the opportunity. Or maybe people getting laid off or worried about their jobs are grabbing EIN numbers (tax ID’s) for their “gig” economy jobs. Thursday's 249,000 of initial jobless claims was the highest this year, and continuing claims (which I think is more important) hit their highest levels since the end of 2021.

If the Fed only followed my advice and cut in July, we might not be in the predicament we currently find ourselves in. Less than 48 hours after the FOMC meeting, statement and Powell press conference, where they put September on the table (but hedged around it), we are now pricing in 1.7 cuts at that September meeting.

Bottom Line

My biggest fear has been that we get a deteriorating economy that the Fed, largely due to lingering inflation fears, doesn’t respond quickly enough to.

We may well be there and would take duration off the table at these levels as the market seems to be getting way ahead of itself in terms of what the Fed will do. As we (or at least I) talk about quite frequently, it is always about what the Fed will do, what they should do.

With the recent sell-off in stocks, it is tempting to add some risk, to play for a possible bounce, but I still don’t think we’ve seen the lows that will be put in on this recent leg down that started July 10, 2024 for the Nasdaq 100. We are nearing the 100-day moving average (decent support), but my target is for the 200-DMA, which is 17,627 on the Nasdaq 100, just above where we bounced back in mid-April.

I am shocked that the 10-year moved to 3.85% already! It was 4.28% just last Thursday! What a move!

While we’ve been talking about the shift from “no” or “soft” landing to “bumpy” landing, it happened in world-record time!

August is likely to continue to keep us on our toes and disrupt our summer plans!