Is there a recession on the horizon?

As we navigate through 2024, investors and economists alike are keenly observing the economic indicators for signs of an impending recession. Recent data, including ISM manufacturing numbers, rising credit card debt, increasing defaults, and various labor market statistics, suggest that economic turbulence may be on the horizon. Let's dive into some these indicators and analyze their implications for the future.

Employment Dynamics

The Rate of Change

The rate of change in full-time versus part-time employment provides valuable insights into the labor market's health and is one of my favorite indicators. The second panel in the initial chart shows the historical rate of change in full-time employment relative to part-time employment. Recent trends indicate stagnation in full-time job growth, with part-time employment rising, a sign that businesses might be cautious about committing to long-term hires amid economic uncertainty. This dynamic has preceded every recession for as far as data was available.

Job Openings

Another critical labor market indicator is the total number of job openings. The second chart juxtaposes the SPX with total nonfarm job openings and unemployment levels. While job openings have seen a decline recently, unemployment levels have remained relatively low at 1.764 million (although rising). This discrepancy could suggest that while there are fewer new opportunities, the labor market is still relatively tight, potentially due to workers being cautious about changing jobs in uncertain times.

These divergences are usually not a great sign for the market. Jobs are the lifeblood of the economy and a trembling jobs market is a reason for concern.

The Yield Curve

The yield curve, particularly the spread between 2-year and 10-year Treasury yields, is a well-known recession indicator. An inverted yield curve, where short-term rates exceed long-term rates, often precedes recessions. The first chart's third panel shows that the yield curve has been inverted recently, signaling potential economic trouble. Although there's been a slight correction, the persistence of this inversion is a cause for concern. The trouble usually really starts when the Yield curve un-inverts.

Conclusion

The combination of these indicators paints a complex picture of the current economic landscape. While the stock market remains robust, underlying economic signals suggest potential challenges ahead. Stagnation in full-time employment growth, the inverted yield curve, contraction in manufacturing, rising credit card debt, and increasing defaults are all red flags that cannot be ignored.

Investors should remain vigilant, closely monitoring these indicators and preparing for potential volatility. Diversifying portfolios, maintaining liquidity, and considering defensive investment strategies could be prudent in navigating these uncertain times. As always, staying informed and proactive is key to managing the complexities of the financial markets.