If you look at the headline numbers, the U.S. labor market is booming. Over the past four months, the economy added an average of 279,000 jobs and the unemployment rate remained at a historic low of less than 4%.
But John Wolfenberger, founder of BullAndBearProfits.com and former investment banker at JPMorgan and Merrill Lynch, says the recession is still underway and the outlook is even bleaker below the surface.
In an interview with Business Insider on Friday, Wolfenberger said one reason the labor market is weaker than it appears is the type of jobs being added. In fact, the number of full-time employees is on the decline, and we are starting to see a trend. The same thing happened at the beginning of the previous recession.
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A large portion of the jobs added last year also came from non-cyclical sectors such as health care, government, and education. These sectors of the economy are generally insulated from recessions.
Bureau of Labor Statistics
At the same time, inflation is persistent and remains above 3% year-on-year. This has forced the Fed to tighten monetary policy to prevent further spikes in price increases. Wolfenberger said the longer the Fed keeps interest rates capped, the longer the pressure will be on the labor market and the broader economy, increasing recession risk.
“I think we could see a decline in the jobs report over the next one, two, three months,” Wolfenberger said. “Employment declines typically begin about two years after the Fed starts raising interest rates, starting in March 2022.”
These risks are reflected in the Conference Board’s leading economic index, which has a perfect track record of identifying recessions, he said. The index takes into account variables such as bond and stock market activity, manufacturing activity, consumer confidence, and lending activity.
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He said that the longer interest rates rise, the longer the inverted yield curve on U.S. Treasuries will last. Inversions in yields on three-month Treasury bills and 10-year Treasuries have preceded every recession since the 1960s.
In addition to high valuations, the inverted yield curve is one reason Wolfenberger has such a dire outlook for the stock market going forward. Historically, the length of a reversal has been related to how severe the ensuing recession bear market was. The current reversal period is about 550 days, about the same period seen before the 2008 recession, putting the S&P 500 at risk of a decline of about 60%. Wolfenberger said the longer the Fed keeps interest rates high and the curve remains inverted, the greater the downside potential.
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Wolfenberger’s views in context
Other market players have also begun warning of weakening labor markets in recent months. Ian Shepherdson, chief economist at Pantheon Macroeconomics, shared several metrics in a note to clients earlier this month, warning of an upcoming job market slowdown.
One of them, as Wolfenbarger pointed out, is the disconnect between additional full-time and part-time jobs. A divergence between the two was also seen during past economic downturns.
pantheon macroeconomics
Shepherdson also highlighted the decline in job turnover, suggesting there is an overall lack of job opportunities that allow people to leave their current jobs. According to the graph, employee turnover of just over 2% suggests that the unemployment rate may rise.
pantheon macroeconomics
Data from the National Federation of Independent Business shows that small businesses are also less willing to hire. This suggests that employment numbers may soon fall into negative territory.
pantheon macroeconomics
However, it remains to be seen whether the labor market will actually weaken significantly. Therm Ruhr’s Recession Indicator also shows that the job market remains far from recession territory. The gauge attempts to identify recessions in real time by tracking a three-month moving average of the unemployment rate. This rule determines that a recession has arrived if the unemployment rate rises by 0.5% within his 12 months. Currently it is 0.3%.
Mr. Wolfenberger’s views on where stocks are headed are also more extreme than those of strategists at major Wall Street banks. Already this year, many banks have been forced to raise their end-2024 stock price targets, as the bull market rally has exceeded expectations.
But the sharp upward trend in recent months (the S&P 500 index is up about 24% since October) means the potential downside if economic conditions worsen could be even more severe. It also means
If Wolfenberger is right and the labor market collapses in the short term, it could catch an unusually bullish market by surprise.
