Economic Warning Signs?
Written by Ryan Bouchey
Two key readings have come out in the past few weeks that coincide with some of our analysis we presented at our State of the Economy presentation back in January. The focus of these two signals, which could potentially be economic warning signs, have to do with jobs and the yield curve.
Jobs
January’s job report was not great, but the concern isn’t for the obvious reason. The biggest headline was how bad the new jobs created number was – producing only 20,000 jobs versus the expectation from economists of over 180,000 jobs. Having one month with a low number like this isn’t all that concerning, and we’ve seen this happen quite a few times during this economic expansion. Back in September 2017 only 18K jobs were created, and May of 2016 on 15K. We could find other examples of one off weakness in job creation during this recovery cycle, but as I said this isn’t all that concerning and there is a history of it. What was more concerning was the convergence of the wage growth number of 3.4% and the unemployment rate of 3.8%. There is a strong history that shows as these two numbers converge, and .4% is the closest they’ve been during this recovery, then a recession usually follows. In isolation, this doesn’t look to cause much concern, but we discussed in January that it was something we would be monitoring and we will continue to monitor it moving forward.
Yield Curve Inversion
Today marked the first time the 3-Month Treasury and 10-Year Treasury note have inverted since 2007 and historically this has been an indicator of an upcoming recession. Now it doesn’t mean a recession or even a market peak will happen overnight. On average there has been a 14-month lead time for when this happens and when a recession begins, so again we aren’t worried that we’re now all of a sudden facing a recession. But it is another indicator and data point that we follow and look for and may impact our investment decisions moving forward.
The biggest thing to remember with recessions and bear markets (or economic cycles and market cycles) is that they don’t perfectly align, and many times the markets react prior to the economic cycle changing. Given the two data points discussed above, along with a Fed which has turned on a dime and become more dovish in recent months, we could be in the early stages of some economic weakness. It doesn’t mean now is the time to panic, but we will be factoring all of this to our investment decision making process.