End Of Cycle: Unemployment Rising

The last three U.S. recessions (blue shaded areas in the chart above) began shortly after the unemployment rate (white line in the chart above) bottomed, then ticked up (usually as more confident job seekers re-entered the labour force) to intersect (and rise through) the 3 year moving average of the unemployment rate (gold line in the chart above). 

On Friday, the U.S. bureau of Labor Statistics announced that the June rate of unemployment moved higher by .2%, from 3.8% to 4.0%, as the number of those seeking work increased.

The 3 year moving average of the unemployment rate is now at 4.6%, the gap between the current rate has narrowed to .6% (highlighted area in the chart above).

In Canada, the unemployment rate also climbed .2% to 6.0%, also with an increase in the labour force).

Economists and the Media chose to focus on the growth in employment (U.S. non-farm payrolls were higher by 213,000 and employment rose by 32,000 in Canada) and now expect that the U.S. Fed and the Bank of Canada will both raise rates by another 1/4%: the BOC as soon as Wednesday of this week, the Fed in September.

With household debt at record levels in both countries (and plenty of $US debt on a global scale), servicing costs for that debt are rising. It will be a problem. Consumers will have less to spend. 2/3 of the domestic economy will come under pressure. Escalating global trade war issues will not help ease this situation.

Economic confidence is crucial to spending decisions: if this slips, both businesses and consumers will postpone decision making and as has happened in all of the end of the cycles that we have previously experienced, GDP growth will slow.

Bond markets have been building this in with flattening yield curves, warning us that we are late in the current cycle (and bond markets always lead other financial markets). Stock markets are still expensive and will at some point in the not too distant future, begin to build this in as well (see my blog from last Wednesday).

Prepare yourselves accordingly.