US Recession Watch: Coming Soon, 

But Not Just Yet

Remember a recession is 2 quarters of back to back negative growth (GDP).

It is never good to try and put too much stock into the US monthly employment data because it is so often revised. However, one should instead look at the developing trend:

Despite a blip higher in the trend in March, April's data (released yesterday) continued the lower growth trend that began at the beginning of 2015 (February and March data were revised lower).

As for the unemployment rate, it ticked up to 5% (from 4.9%) and the labour force participation rate fell. Not, for the moment, anything of any apparent major significance. However, if the trend is turning (higher unemployment), it could be very significant:

Historically, when the unemployment rate (green line) crosses the 36 month moving average (brown line), it indicates the beginning of a recession (blue area). At the moment the brown line is at 6%, so they are still rather far apart. 

But, the brown line is falling at a steep clip, about .2% per month. In 3 months it will be close to 5.4%, in 4 months 5.2%.

If the unemployment level increases just .2% in 4 months, it could indicate the recession will begin then.

So folks, 4 months to prepare.

Here is the caveat: bond yields.

When the yield curve flattens, short-term yields rise to higher levels than long-term yields: as they did in 2007 (somewhat in advance of the 2008-2009 recession).

However, it could also happen that long-term yields fall as investors move to higher quality (less risky assets) in advance of a coming recession.

As you may recall, one of Paul's top picks on BNN a couple of weeks ago was 30 year Government of Canada bonds. So that is why.

It may not be that the US Federal Reserve needs to raise rates (push short-term yields higher) to create a recession (but if they do, that will certainly add to the probability).

So, we shall be watching these developments closely.

Stay tuned.

Your feedback is always welcome: scott@highrockcapital.ca

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