Warning: This recession signal if flashing red

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Warning: This recession signal if flashing red
Credit: © Reuters.

BCA Research highlighted a potential signal for an impending US recession based on historical patterns of unemployment rates.

According to their analysis, the 3-month moving average of the unemployment rate has risen to 3.87% from a low of 3.5% earlier in 2023, marking a concerning trend.

The recent uptick in April from 3.8% to 3.9% has triggered what BCA refers to as a recession signal, also ticking a box in their Equity Downgrade Checklist.

BCA's report also notes that small- and medium-sized businesses (SMBs), which form the bulk of US employment, have shown decreasing hiring intentions for the coming three months. This trend is expected to exert additional upward pressure on the unemployment rate.

BCA's findings suggest that the labor market softening could lead to slower income growth amidst dwindling excess savings and tighter consumer credit, potentially hampering consumer spending.

Adding to the recession indicators, BCA points to several segments of the yield curve that are currently inverted, alongside a contraction in the US Leading Economic Index on a year-on-year basis.

Another metric, known internally at BCA as the "Mel Rule," which is based on state-level unemployment rates, is also indicating potential economic trouble ahead.

"We do not subscribe to the no-landing narrative and expect that a continuation of the softening trend in labor demand will lead to decelerating income growth at the same time that excess savings dry up and consumer credit becomes more scarce, hobbling consumption growth," BCA said.

"Investors should underweight risk-assets on a cyclical investment horizon. Given sanguine market sentiment equities are at a heightened risk of declining."

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