Investors seem to be getting over their recent fear of recession, citing ongoing strength in the US labour market as a key reason to be cheerful. That's a mistake, argues David Rosenberg, the frequently bearish chief economist at Canadian wealth manager Gluskin Sheff. "Everyone continues to say I don't see a recession'," he says. But "like carbon monoxide, that odourless gas, it creeps up on you without your realising it".
He notes that employment is typically a lagging indicator (ie, it doesn't start to fall until the point at which the economy is already in trouble).So using jobs statistics as any guide to the future "is a waste of time because they are not... forecasting tools".
There are many other signs that a recession is coming. Inflation is weakening, even though commodity prices have roared ahead in the year to date "this is the fastest start ever for the resource complex even hotter than 1973 when the oil embargo began", notes Rosenberg. And yet "inflation expectations continue to melt... this is not the hallmark of a fast-growing economy".
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Investors still believe that Fed chief Jerome Powell will step in to loosen monetary policy if things deteriorate. The trouble is that monetary policy also acts with a lag the Fed would need to be looking at cutting now, which does not seem to be on the cards, to prevent a slump. Remember, says Rosenberg, "that ten of the last 13 Fed hiking cycles have ended in recession". So don't bet on a Fed bail out coming in time.
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