Recession in the US

US is in a recession, based on the last 2 employment reports and labor benchmark revisions. Most probably NFP was negative during several months in 2024 already. And it’s hardly positive right now. Asset prices, AI capex, and consumers willingness to reduce savings rate maintained aggregate growth of the economy. If current labor weakness spirals, there’s a problem.

There were some extreme statistics recently pointing out to very weak labor market. The 1-month drop in private employment relative to labor force (70bp) is consistent with prior recessions. That’s Sahm Rule triggered in just 1 month.

Flows of unemployed people out of labor force are accelerating. Finding a job is getting harder. And people give up faster.

Household employment sentiment is seriously depressed as a result. Such level was historically associated with large job cuts arriving soon after.

Not surprisingly, corporations are signaling faster reduction in employment as well.

And of course job creation revisions were significant second year in a row – another recessionary indicator.

Given current 6-month rate of NFP growth, job losses usually accelerate and precede all previous recessions. 2010 was a false positive, when job market bottomed after similarly weak prints. When NFP growth slows to 0.05% over the last 6 months (as it is at the moment), average forward 6 months growth is -0.12%. I.e. NFP turns negative, layoffs are rising. That’s equivalent to 1-1.2mn of expected job losses over the next 6 months.

But is the cycle going to improve from here? Even though ISM orders were better in August, backlogs are still deteriorating and inventories are rising. Usually all three ISM components are synchronized.

And when they diverge, that’s a bad sign for the economy, or the cycle direction at least. Orders aren’t translated into sustainably stronger backlogs at the moment. But companies are accumulating inventories in anticipation of better demand (and tariffs front running). What if orders stay low and inventories have to be sold out?

And what about inflation? It’s losing more steam, according to US small businesses. Tariffs impact has been marginal so far.