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”.
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.