I follow my firm’s “recession scorecard” quite closely when deciding on asset allocation decisions.  Without getting into the weeds too much, this scorecard is a collection of 7 leading economic indicators that try to forecast the future direction of the American economy with the current focus today being whether the U.S. economy will fall into recession in 2025 or not. 

For those keeping score, the indicators are: the difference between the 10 year and 1 year U.S. treasury bond, unemployment claims, the unemployment rate, the conference board of leading economic index, non-financial corporate cash flows, ISM new orders minus inventories, and the fed funds rate versus the nominal GDP growth rate. Currently four of these seven factors are suggesting a recession is coming in the U.S.  Of these seven indicators, the unemployment rate is the most important to the “recession/no recession” discussion, at this time, for at least two reasons: because of its perfect track record of signaling the imminent onset of recession since it was first published in 1948, and because it factors mightily into Fed thinking about whether to and by how much to cut rates.  This indicator is currently flashing red!

Fed Chair Jerome Powell, in the press conference following the Federal Open Market Committee’s September meeting, noted that the labor market had cooled, and that the Fed would not welcome any additional weakness on the employment front. Many observers believed the Fed’s September rate cut was larger than normal because of the surge in the reported July unemployment rate to 4.3%.  However, since then, the unemployment rate fell for the second straight month. That decline has not altered its “red” status. The monthly rate has been above the smoothed trend for eight consecutive months, and that smoothed trend continues to rise. However, its important to note, the gap between the two has narrowed, and a couple of more months of a falling unemployment rate would, at the very least, muddy the future picture of an upcoming recession.

Several factors argue in favor of the unemployment rate resuming its climb in the coming months.  First, temporary employment continued to fall even in September’s blowout payroll gains. Employers typically reduce temp jobs before they lay off permanent employees. Second, the multi-quarter decline in the number of workers voluntarily quitting their jobs accelerated sharply lower according to the September report. Third, small business hiring plans remain well below pre-pandemic levels according to the National Federation of Independent Business. Lastly, the already-rising percentage of respondents who reported jobs were “hard to get” jumped higher in the latest Conference Board’s Consumer Confidence Survey. All the above have been useful leading indicators of where the unemployment rate was headed in the following six to 12 months.

Bottom line: the jury is still out on the American unemployment picture forecasting a recession, but the picture should become clearer in the next two quarters.  To complicate matters, the Canadian economic picture seems to be faring a little worse as it deals with some 'made in Canada' issues that do not affect the U.S. economy as much, so looking south of the border to predict a Canadian recession may not be as helpful as it normally has been in the past.  Notwithstanding, Canada’s better than expected employment gains this past Friday, Canada’s economy seems to be closer to the tipping point than the Untied States.  Stay tuned! 

Mike Candeloro, Senior Portfolio Manager and Wealth Advisor with RBC Dominion Securities and the head of The Mike Candeloro Wealth Management Group supplied this article. RBC Dominion Securities Inc. and Royal Bank of Canada are separate corporate entities, which are affiliated. Member CIPF. Mike can be reached at Michael.candeloro@rbc.com   You can also visit his website at www.michaelcandeloro.com   To read Mike’s archived articles please visit Mike Candeloro / Special to The Nugget | National Post