Wall Street is sniffing the wind for any hints that a recession is blustering our way. And there’s one leading indicator that has a good record of detecting a downturn, according to economist Joseph Lavorgna: an increase in the unemployment rate of half a percentage point.
Lavorgna, chief economist, Americas, for Natixis, pointed out in a research note that in the 11 business cycles over the past seven decades, a 0.5 percentage point rise from a trailing cycle low has unfailing portended a recession.
Turns out that the current jobless rate is 0.3 point above such a low, meaning it is almost at the red line.
These days, of course, unemployment is subdued, so expecting a recession seems absurd. The current rate is 4.0%, which is up from November’s 3.7% low.
But, Lavorgna cautioned, such an unhappy outcome has occurred before: In 1953, the rate moved up that half-point to 3.1%, even lower than today. And sure enough, a recession struck. At the moment, Lavorgna explained, he believes that rise from very, very low to just very low is a “sign of economic strength, not weakness.”
In fact, the economist expects the rate to drop back below 4.0% in the next few months.
Meanwhile, he said he will be looking at other indicators as well, such as the yield curve, credit spreads, and consumer expectations. And for the record, he contends that the risk of a downturn is under 50%. Now that’s a more comforting percentage.