The chart making waves on social media isn’t getting attention without reason. It suggests that the real turmoil in the US labour market kicks in only after the yield curve has been inverted for over a year. Investors might be celebrating a soft landing prematurely.
This chart uses initial jobless claims as an indicator for the US labour market. This year, those initial unemployment claims have thrice surprised economists and the Federal Reserve. Three times it appeared a structural increase was in play, only to decline sharply again. However, the chart reveals that this pattern isn’t as peculiar as it might seem. The tightening cycle of the Federal Reserve, often resulting in an inverted yield curve, takes time to manifest in the reported macro numbers.
The chart below, perhaps, illustrates this even more vividly. It displays the cumulative increase in US unemployment against the cumulative interest rate hike during the most intense tightening cycles of the Fed since the early ’70s. Notably, the cumulative interest rate increase is shifted two years forward for this representation.
This chart paints a clear historical picture. Two years on, unemployment typically surged by about three percentage points. There’s only one exception: the 1994-1995 tightening cycle (represented here as shifted forward to 1996-1997) where unemployment remained stagnant. Coincidentally, this was also the only Fed tightening series not followed by a recession.
So, for those holding out hope for a soft landing, there might be a glimmer yet. But historically, the genuine weakening of the US labour market could still be on the horizon. With fragile consumer confidence and the wane of Covid-related ‹excess savings›, a drop in consumer spending might ensue. And when that happens, a recession is often lurking just around the corner.
Jeroen Blokland is the founder of True Insights, a platform that offers independent research for diversified multi-asset portfolio construction. Formerly, Blokland was the head of multi-assets at Robeco. His ‹Chart of the Week› feature appears every Monday on Investment Officer Luxembourg.