Popular recession indicators like the Treasury yield curve and The Conference Board’s Leading Economic Index have been signaling for over a year now that a downturn is ahead.
Last week, a lesser-known gauge — with just as impressive a track record — joined their ranks in warning of trouble ahead for the US economy.
With the release of April’s jobs data on Friday from the Bureau of Labor Statistics, Piper Sandler’s recession indicator of the three-month moving average of the year-over-year percentage change in unemployed persons crossed the 10% threshold that has been met in the last 11 downturns.
Piper Sandler
The indicator is similar to the “Sahm Rule,” which says that a recession has arrived as soon as the three-month moving average of the unemployment rate has risen by 0.5% within a 12-month window. The gauge has been on the rise and now sits at 0.37%.
Michael Kantrowitz, the chief investment strategist and head of portfolio strategy at Piper Sandler, said in a client note on Monday that while both measures have historically been accurate, his firm’s rule has the benefit of not being influenced by labor participation rates, which can be a reason the unemployment rate rises.
St. Louis Fed
As is evident in the Piper Sandler chart above, we could already be in a recession. According to Piper Sandler’s analysis, the firm’s indicator has typically preceded the National Bureau of Economic Research’s recession announcements — which are delayed from the actual start dates of recessions — by about four months.
Many labor market indicators also show further weakness is probably coming, Kantrowitz said. For example, National Federation of Independent Business survey data on hiring plans points to rising unemployment claims.
Piper Sandler
Despite the seemingly downbeat data, however, Kantrowitz was quick to say that he is not making a recession call now and that there is “plenty” of time before investors have to be concerned about a downturn.
He also said that stocks likely have more upside until the labor market or earnings deteriorate more significantly and that Federal Reserve rate cuts will actually boost the market in the near term as a result of any weakness.
“This is NOT about us making a recession call, it’s all about how we think bond and equity markets will react to broadening evidence of an economic slowdown,” Kantrowitz said in the note, the emphasis his. “As we’ve pounded the table since October 2023, anything that leads to lower rates is bullish for equities.”
In 2001 and 2008, Fed rate cuts did not help stocks, Kantrowtiz said, because stocks were positively correlated to interest rates. But this cycle is more similar to cuts from the 1970s to the 1990s, he said, when stocks rose because of their negative correlation to bond yields.
Piper Sandler
“There have been 5 recessions (69, 73, 80, 81, 90) where stocks bottomed in a recession when rates started falling. This is in stark contrast to 01 & 07, when lower rates did little to boost equities (rates and stocks fell together),” Kantrowitz said. “Current correlations point to stocks rallying if rates fall even if we enter a recession.”