There have been no recent scorecard rating changes. However, two of the seven indicators have failed to move in the anticipated direction over the past month.
October 10, 2024
Jim Allworth Investment StrategistRBC Dominion Securities
The unemployment rate fell for the second straight month. That decline has not altered its “red” status. The monthly rate has been above the smoothed trend for eight consecutive months, and that smoothed trend continues to rise. However, the gap between the two has narrowed, and we think two more months of a falling unemployment rate would, at the very least, muddy the picture.
The line chart shows the U.S. unemployment rate and its 3-month smoothed trend from 1950 through September 2024. Both the rate and the trend line have been rising since mid-2023, and the rate has been above the trend for eight months. In September, the unemployment rate was 4.1% and the smoothed trend value was 4.0%.
Source – RBC Wealth Management, Federal Reserve Bank of St. Louis (FRED); data through 9/30/24
The unemployment rate is important to the “recession/no recession” discussion for at least two reasons: because of its perfect track record of signaling the imminent onset of recession since it was first published in 1948, and because it factors mightily into Fed thinking about whether to and by how much to cut rates.
Fed Chair Jerome Powell, in the press conference following the Federal Open Market Committee’s September meeting, noted that the labor market had cooled and that the Fed would not welcome any additional weakness on the employment front. Many observers believed the Fed’s September rate cut was larger than normal because of the surge in the reported July unemployment rate to 4.3 percent.
Several factors argue in favor of the unemployment rate resuming its climb in the coming months:
All the above have been useful leading indicators of where the unemployment rate was headed in the following six to 12 months.
This indicator has been wobbling around either side of zero. The New Orders Index taken by itself has been painting a negative picture for some time—22 of the past 24 months have shown new orders contracting for the manufacturing sector. However, inventories have also mostly been contracting over that stretch, leaving the net of the two indexes not telling us very much about the likely course of manufacturing from here.
Overall, we think the scorecard is red enough to argue for a cautious, watchful approach to equity investing but, at the same time, not deteriorating at a pace that would unequivocally rule out the possibility of a soft landing for the U.S. economy.
Source – RBC Wealth Management
RBC Wealth Management, a division of RBC Capital Markets, LLC, registered investment adviser and Member NYSE/FINRA/SIPC.
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