Recession fears have cooled off in recent months as the US economy continues to prove resilient (did you see that GDP number?) and the Federal Reserve slashes interest rates.
But a labor market chart flagged by one bearish strategist on Tuesday might give investors pause.
The chart, shared in a client note from Société Générale's Albert Edwards, shows the US unemployment rate (in red) alongside its three-year moving average (dotted line). Since 1950, in eight instances where the unemployment rate has begun an uptrend and broken through its three-year moving average, a recession has followed.
"Recession is the biggest threat to equities, although in recent downturns financial problems have preceded (or caused) recessions," Edwards wrote in the note. "I don't think any guru is forecasting a recession in 2026. Yet the simple correlation shown below has a 100% track record of success."
The chart mirrors the concept of the Sahm Rule Recession Indicator, which says that the US economy is in a recession when the three-month moving average of the unemployment rate increases by more than 0.5% from its lows over the previous 12 months. In other words, if unemployment rises too quickly, it signals that things are about to get worse.
Although it had been hailed for its back-tested accuracy since its release in 2019, the gauge produced its first false reading in August 2024.
It remains to be seen if the labor market weakens materially, as Edwards' chart suggests could happen. Hiring rates and job openings remain sluggish. But other important measures of the economy's health — like consumer spending and GDP growth — remain strong.
Another signal that a recession could be on the way, according to Edwards, is a steepening of the Treasury yield curve following its inversion. However, while falling short-term rates following an inversion are usually accompanied by a floundering job market and consumer, today's economy seems to be in a stronger starting place.
