Are We Headed to Another Recession?

Depending on your point of view, last Friday’s nonfarm payroll report showed some minor labor market weakening or a full-blown recessionary downtrend.

If you happen to believe that government economists are accurately calculating seasonal adjustments in labor market activity, Friday’s report showing a gain of 151,000 jobs is a relatively minor indication of labor market weakness.

On the other hand, you could look at the Bureau of Labor Statistics’ data showing a decline of nearly 3 million jobs since November as a trend that portends rough times ahead.

This begs the question…

Is the US heading into a recession, and, if so, when?

If a U.S. recession were imminent, we would naturally expect to see deterioration in the labor market. And that’s exactly what we’re seeing. And it doesn’t matter whether you look at the seasonally adjusted numbers or the BLS’ raw data. The result is that the job market in the U.S. is slowing down.

The following chart shows non-farm payrolls (in black) to be at roughly the same levels as just before two previous recessions in 1999 and 2007. Now, in and of itself, this downward trend doesn’t necessarily guarantee a future recession.

But when we add a leading economic indicator such as falling bank loan activity, the trend becomes clearer. As you can see, bank lending to small businesses (in red) is falling precipitously.

nonfarm-payrolls-banks-tightening

To be sure, falling bank lending is a sure-tell sign of weaker economic fundamentals.

And because bank tightening precedes declining payrolls by about 6 months, the negative employment picture accelerates as small businesses have difficulty funding their operations and meeting their payroll obligations.

This means we could see negative GDP numbers by spring 2016.

Now, it’s possible that banks will loosen their lending standards for small businesses in the interim. If that were to happen, we would expect employment trends to stabilize or even pick up.

But to date, there is no evidence that lending standards are getting looser. In fact, it’s quite the contrary. With the liquidity troubles brewing in the junk bond and ETF sectors, were seeing a decrease in bank lending as banks attempt to avoid the kinds of problems they experienced during the financial crisis of 2008.

For now, all signs point to continued deterioration in the unemployment outlook, and a stock market that will continue lower.

 

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