A legendary economist says the declining job market is the ultimate indicator that the US economy is headed toward a recession.
David Rosenberg, who predicted the 2008 downturn while he was Merrill Lynch’s chief economist, recently told clients the revelation that the US economy created 818,000 fewer jobs over the last year than originally reported was the largest downward revision since the Great Recession.
The Bureau of Labor Statistics said the jobs growth data from March 2023 to March 2024 was actually 30 percent less than its initial figure of 2.9 million, a devastating blow Rosenberg says may spell doom in the near future.
Rosenberg, the founder of financial insights firm Rosenberg Research, also aimed his ire at the Federal Reserve for stubbornly refusing to ease interest rates since July 2023.
Fed policy ‘has been too tight, and for too long, to avoid causing an economic slowdown,’ he wrote last week in a client-circulated note obtained by Business Insider.
David Rosenberg has been warning that the US is on the brink of recession over the last couple of years, but has gotten especially vocal in 2024 about his fears
He also attacked the Fed for raising interest rates as high as it did, something Fed Chair Jerome Powell committed to for 11 straight meetings from March 2022 to July 2023.
The current federal funds rate is at 5.5 percent, a 23-year high.
This rate trickles down to consumer lending and when it’s elevated, mortgage rates and credit card APRs go up in tandem.
The Fed was forced to hike interest rates to reign in consumer spending and tame inflation, which fell to 2.9 percent in July.
The Fed is still targeting a 2 percent inflation rate.
‘Incredibly, the Fed raised rates 500 basis points under a false presumption – by over one million – of just how robust the jobs market was,’ Rosenberg wrote.
Rosenberg has been warning that the US is on the brink of recession over the last couple of years, but has gotten especially vocal in 2024 about his fears.
Despite a 206,000 jobs being added to the economy according to the June nonfarm payrolls report, Rosenberg pointed out that full-time employment was down 1.2 percent since the beginning of the year.
Back in May, when it came out that 63,000 fewer jobs were added in the month of April, Rosenberg even warned the Fed about the upcoming revisions in the employment numbers.
‘It will come as a shock to the Fed – and to the markets as well,’ Rosenberg said at the time.
Rosenberg is predicting the US economy is headed toward another recession with a flailing labor market being the catalyst. A Lehman Brothers employee is pictured exiting the office on September 15, 2008, the day the failed financial services firm filed for bankruptcy
After news of the downward revision of 818,000 jobs came out, major indexes – the S&P 500 and Dow Jones included – did briefly trade away gains before recovering entirely by stock market close on Friday.
But Rosenberg points to two models he believes paint a foreboding picture for the more long term future of economy overall.
One aims to enhance the yield curve – a tool used to gauge the risk appetite of bond investors – and make it into a recession indicator.
The model takes into account US businesses’ ability to repay debt, a.k.a. corporate bonds, and the Fed’s National Financial Condition Index, a weighted average of a myriad of factors thought to evaluate the tightness or looseness of the economy.
This combined measure currently shows a 57 percent chance of a downturn.
Unemployment rose to 4.3 percent in July – the highest level in almost three years
The Federal Reserve held interest rates between 5.25 and 5.5 percent at its latest meeting
The other model Rosenberg points to was made by economists Pascal Michaillat and Emmanuel Saez. This one focuses on the number of job openings.
It shows the US is in ‘possible recession’ territory, with the graph trending up toward ‘sure recession.’
There are, however, some dissenting voices saying last week’s downward jobs revision isn’t all its cracked up to be.
Ian Shepherdson, the chief economist at Pantheon Macroeconomics, said average monthly job gains are strong despite the revisions.
‘It tells us nothing about payrolls since March, and has no implications for the unemployment rate, which is measured by the separate household survey,’ Shepherdson said in a note to clients.
He continued: ‘The monthly profile of the benchmark revisions will be released next February, but the total roughly indicates that payrolls grew at a still-respectable average pace of about 175K in the twelve months to March, compared to 232K previously.’
Federal Reserve Chairman Jerome Powell, left, Governor of the Bank of Canada Tiff Macklem, center, and Governor of the Bank of England Andrew Bailey pose for a photo at the Fed’s yearly retreat in Jackson Hole on August 23, 2024. At this gathering, Powell signaled a change in policy is coming
Although Rosenberg believes the Fed is acting too late to contain the economic fallout, Powell does appear set to take action.
‘The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,’ Powell said on Friday at the Fed’s annual retreat in Jackson Hole, Wyoming.
The next Federal Open Market Committee meeting, where interest rate decisions are hashed out, is scheduled for September 17 and 18.
The Fed is expected to cut rates by at least 25 basis points, and the consensus view on Wall Street remains that the economy will make a soft-landing. This essentially means that we will narrowly avoid a recession.
Still, a soft landing almost entirely depends on job data in the coming months, and if labor continues to weaken, Rosenberg expects a bumpy ride ahead.
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