Looking at the headline numbers, the US labor market is booming. Over the last four months, the economy has added 279,000 jobs on average, and the unemployment rate has also stayed below 4%, historically low levels.
But Jon Wolfenbarger, the founder of BullAndBearProfits.com and a former investment banker at JPMorgan and Merrill Lynch, says a recession is still on the way, and the outlook is bleaker if you look beneath the surface.
In an interview with Business Insider on Friday, Wolfenbarger said one of the ways the labor market is weaker than it looks is the kind of jobs being added. The number of full-time employees is actually declining, and it’s starting to look like a trend. The same has happened at the start of prior recessions.
St. Louis Fed
A large percentage of the jobs added over the last year have also been from non-cyclical sectors like healthcare, government, and education. These areas of the economy are generally insulated from downturns.
Bureau of Labor Statistics
At the same time, inflation has been sticky, hanging above 3% year-over-year. This is forcing the Fed to keep monetary policy tight to prevent another flare-up in price growth. Wolfenbarger said the longer the Fed keeps rates restrictive, the longer it puts pressure on the labor market and broader economy, raising recession risks.
“The next one, two, three months of job reports, I think we could start to see declines,” Wolfenbarger said. “Typically, job declines start kicking in about two years after Fed rate hikes start, and they started March 2022.”
These risks are being reflected, he said, in The Conference Board’s Leading Economic Index, which has a perfect track record of identifying recessions. The index takes into account variables like bond and stock market activity, manufacturing activity, consumer confidence, and lending activity.
The Conference Board
He said that higher rates for longer also extend the time that the Treasury yield curve remains inverted. Inversions of yields on the 3-month Treasury bill and 10-year note have preceded every recession since the 1960s.
In addition to high valuations, the inverted yield curve is one reason Wolfenbarger has such a dire outlook for the stock market going forward. The length of inversions has historically been related to how deep a subsequent recessionary bear market has been. The current inversion duration of about 550 days, roughly the same amount of time seen before the 2008 recession — puts the S&P 500 at risk of about a 60% sell-off. The longer the curve stays inverted as the Fed keeps rates elevated, the bigger the downside potential, Wolfenbarger said.
OVOM Research/Bullandbearprofits.com
Wolfenbarger’s views in context
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