The U.S. economy added just 150,000 jobs, fewer than the 180,000 expected, and the unemployment rate rose to 3.9%, now 0.5% higher than its low earlier this year. Figures for September and August were also revised downwards, meaning they are now eight consecutive months below their original figures, according to Jon Wolfenbarger.
For Wolfenbarger, founder of the market newsletter site BullAndBearProfits.com and a former investment banker at JPMorgan and Merrill Lynch, the jobs report was the latest sign that the labor market will continue to weaken.
"I think today's jobs report was a disaster and confirms my view that the Fed's rate hikes and yield curve inversion will lead to a rapid rise in unemployment, a recession, and a significant downturn for the market." of securities," Wolfenbarger told Insider on Nov. 3.
There are three main pieces of evidence supporting Wolfenbarger's view that the labor market is about to collapse. The first is that job growth has slowed to 2.1%, a level that is considered prior to previous recessions. Following highs reached in previous cycles of Federal Reserve rate hikes, job growth has typically slowed for another two years, Wolfenbarger said, meaning a further slowdown may be on the way.
Federal Reserve Bank of St. Louis/Bullandbearprofits.com
Second, the inverted yield curve is starting to steepen. An inverted yield curve has been an extremely reliable recession indicator for the past few decades. A reversal occurs when short duration returns rise above long duration returns. Yields typically invert largely due to the Federal Reserve raising its overnight lending rate, which closely tracks 3-month yields. The Fed's rate-hiking cycles are intended to slow the economy, creating a greater risk of recession.
The spread between 3-month and 10-year yields has inverted for about a year now, but the curve is starting to steepen. This usually starts happening when the Federal Reserve is about to finish raising its rates and usually coincides with a rising unemployment rate.
The graph below shows that each time the yield curve has reached the inversion territory, marked by the horizontal black line, unemployment has begun to rise along with the further steepening of the yield curve.
Trahan Macro Research LLC/Bullandbearprofits.com
And third, small businesses are not optimistic right now or about future hiring. With small businesses accounting for about 60% of all hiring over the past three decades, Wolfenbarger said this doesn't bode well for the labor market.
Here's the National Federation of Independent Business' index on hiring plans for the next three months (shown in blue, forward six months and reversed) along with the unemployment rate (shown in orange). The two tend to move in unison.
Trahan Macro Research LLC/Bullandbearprofits.com
Given these signs, Wolfenbarger says a recession is coming, as well as a decline in stocks. The S&P 500 just touched up its 36-month moving average, which has been a potential danger sign in the past. While the market did not fall much below the moving average in 2020 and 2022, extraordinary fiscal and monetary circumstances existed in 2020 and there was no recession in 2022.
When the market hit the moving average in 2001 and 2008, recessions occurred and sank the S&P 500 more significantly: around the 40-50% range. Wolfenbarger believes this is the scenario that will likely play out this time.
Bullandbearprofits.com
"The leading indicators tested show that the unemployment rate is likely to begin to rise materially soon. That will likely be the final nail in Wall Street's 'soft landing' narrative, causing stocks to fall well below average." 36mm mobile," Wolfenbarger said.
He added: "The market is bigger and more powerful than the Federal Reserve and the damage has already been done by causing a major recession and a bear market with the rate hikes and the inverted yield curve. Remember that the Federal Reserve cut the rates in the early 2000s and in 2008. "The 2009 recessions and bear markets couldn't avoid them."
Wolfenbarger's views in context
Bearish forecasters have been forced to eat their words this year as the economy has held up against higher rates.
Economists at Bank of America, JPMorgan and Pantheon Macroeconomics have all They walked back their recession calls in recent months, with inflation and the unemployment rate below 4%, GDP growth still roaring and the Federal Reserve seemingly done raising rates.
But the window for a recessionary outcome is still open. According to Piper Sandler's Michael Kantrowitz, the number of jobless claims remains within the normal range for 12 months following a yield curve inversion. Here are the numbers for the current cycle compared to previous investments and recessions.
Piper Sandler
In addition to the yield curve and employment indicators above, other recession indicators continue to point to a slowdown ahead. One of them is to tighten banks' lending standards for both consumers and businesses.
Here is a graph of Albert Edwards of the Sociรฉtรฉ Gรฉnรฉrale showing stricter lending standards for small businesses, according to the NFIB. It is at levels normally seen at the beginning of a recession.
General Company
Another is the increasing number of bankruptcies among small businesses, shown below in another chart from Edwards.
General Society
Credit card delinquencies are also increasing, indicating a weakening consumer.
loan tree
However, none of these indicators are a guarantee of a future recession, and data in the coming months will reflect the health of the US economy.
Wolfenbarger said the average time it takes for a recession to develop after a yield curve inversion is 6 to 17 months. A year after the investment, he said he would expect a recession to develop in the next five months. Time will tell if Wolfenbarger or the bulls betting on a soft landing are right.
