Undeniable Proof of the Coming Recession

|April 18, 2022
Recession ahead - road sign warning concept

So long, welfare state!

Ha… we can dream.

But the folks in charge are surely running high on last week’s jobless claims figures. The number of Americans looking for an unemployment check is at a 54-year low.

We’d have to go back to the days of Lyndon Johnson to see figures like these.

Victory, right?

Tell that to the recession in 1969. It came just months after the workforce was last stretched this thin.

In fact, we beg readers to dig a bit deeper into what today’s dangerously low unemployment really means.

Just as an inverted yield curve has accurately predicted nearly every modern recession, this indicator also has a stellar track record.

We shared the idea with our Manward Letter readers back in December, when we first pushed the idea that a recession was coming. Most thought it was impossible.

Resource Fail

The political class has spent the past year celebrating the rapid rebound in the jobs market. The unemployment rate has gone from an incredible 15% at its 2020 high to a mere 3.6% today.

The current rate is well below the long-term average of about 5.75% and, importantly, is at or below what many consider to be the “full employment” rate.

That’s trouble.

It always has been.

You see, it’s impossible to get to 0% unemployment. There’s always some “friction” in the market as folks move from one job to the next.

That’s normal. It’s healthy.

In fact, economists (at least the good ones) tend to worry anytime we get below the full level of employment – as we are now. When unemployment dips below its natural rate, it means workers are scarce and the economy is running too hot.

Something has to give.

Going Deep

This brings us to a rather complex idea known as the “production possibility frontier.”

Those are some big words, we know. They scare us too. But they’re important… Stay with us.

While the math is complex, the result is not.

Just like the “efficient frontier” that old-schoolers use for portfolio analysis, this equation shows us the ideal mix of production and resources.

In the world of economics, if a company – or, in this case, a country – is not able to utilize its resources adequately, it creates what we call a “recessionary gap.”

Lots of things can cause it.

But in this case, it comes from the effects of the workforce being stretched too thin. The economy is running above its “normal” state.

Too much production is coming from too few workers.

The economy is too hot. It can’t last.

That’s why the Fed has two mandates – control the money and control the jobs.

With inflation at a 40-year high and jobless numbers at a 54-year low, it’s clear that the Fed has failed (miserably) on both fronts.

It creates a conundrum.

The recessionary gap that has economists so worried was created by the inflationary effects of the Fed’s massive money printing.

It literally paid people to sit around and do nothing… usually a fair sign of trouble.

Once the veil of that monetary easing is lifted (which is happening, er, uh, right about now), the gap will be revealed and trouble will brew.

Yep… Here It Comes

This idea of beyond-full employment leading to a recession has great historical merit.

Since 1969, an unemployment rate trough has preceded every recession by an average of nine months.

With jobless figures reaching well below historical averages in recent weeks, that puts us perfectly on track for a big slump late in the second half of 2022.

Unemployment Rate Trough Signals Recession

That’s when the Fed will let its foot of the brakes, ponder lowering rates again… and get the entire cycle started anew.

It means we need to hold our nose, cover our eyes and buy the dips.

Stocks almost always fall the most before a recession… and start rising before anybody even knows one has arrived.

More on that later this week…

For now… don’t sweat it.

We’ve got this old bull by the tail.