Last week, we received a mixed bag of employment data:
- The NFP Establishment Survey was nothing to write home about.
- NFP Household Survey was, in comparison, a bit uglier.
- Then, the ISM Services Unemployment Number reached recessionary levels.
Finally, the job openings survey (JOLTS) dropped significantly. Job openings tend to forecast employment (or unemployment) numbers with a lag of ~8 months.
Why Does Unemployment Matter?
The yield curve inverted in 2022. Leading economic indicators from the Conference Board are at recessionary levels. The ISM Manufacturing Index has been at recessionary levels for some time as well.
The last shoe to drop is employment. This is not unique to 2024. Unemployment is always the final number to rise; by the time it does, we’re already in a recession.
2022 & 2024: The 2-Year Lag
Deteriorating unemployment numbers shouldn’t come as a surprise. The Federal Reserve began hiking interest rates in March 2022. Federal Reserve studies show that monetary policy needs 1.5 to 2 years to take effect.
To measure this, look at the difference in the 10-year U.S. Treasury yield over a 2-year period.
Yields were roughly unchanged between January 1, 2020, and January 1, 2022.
By Spring of 2022, this differential had increased by 2 percent. Between the Fall of 2020 and the Fall of 2022, 10-year U.S. Treasury rates increased by over 3 percent.
This amounts to the most significant tightening of economic conditions in 30 years. We’re right at the point where we should begin seeing this tightening in the data.
A soft landing isn’t out of the question; however, given the restrictive monetary policy of 2022, the probability of a hard landing in 2024 remains high.
