Increase in unemployment rate signaling a U.S. recession

Our final chart of the year highlights U.S. unemployment which has begun to increase from recent lows. Throughout 2023, the U.S. economy generally outperformed expectations, driven by higher consumer spending which represents approximately two-thirds of the U.S. economy. The U.S. consumer continued to spend despite having to endure higher interest rates by drawing down excess savings accumulated during the COVID pandemic. The key question now is, will interest rates be lowered before U.S. (and Canadian) consumers dramatically decrease their spending?

Source: National Bank Financial

In the supplied chart which tracks U.S. unemployment rates back to 1968, the red line represents the three-month average U.S. unemployment rate while the blue line shows the change in the unemployment rate from recent lows. Grey bars represent U.S. recessions. The current increase in unemployment from recent lows has reached the level (~0.3%; red dotted line) which has been a leading indicator for prior U.S. recessions. As you can see, an increase in the unemployment rate of this magnitude has signaled the start of each of the last eight recessions since 1968, without exception and without false signals. Stated slightly differently, every time we’ve seen the U.S. unemployment rate increase by more than one-third of one percent from its recent lows, a recession has followed. You will also notice that once the increase in unemployment has crossed this threshold, it continues to increase (more job losses) until the end of the recession (grey bars). The reason this matters for investors is stocks are likely to perform very differently next year if the U.S. experiences a recession compared to if a recession can be avoided. Historically, the US stock market (i.e. S&P 500) performs very poorly during a recession. The average sell-off from peak to trough for the S&P 500 over the past seven recessions is 35.8%. The smallest sell-off for the S&P 500 during a U.S. recession was 17.1% in the late 1970’s while the largest recession sell-off (56.8%) occurred during the Global Financial Crisis of 2008. Conversely, history suggests the U.S. stock market could continue to experience positive returns in 2024 if a recession is avoided. We will continue to closely monitor U.S. unemployment data and its implications for a recession in the U.S. next year. Wishing you and your family a very happy holidays and we hope you have enjoyed reading our articles over the past year.

National Bank Financial - Wealth Management (NBFWM) is a division of National Bank Financial Inc. (NBF), as well as a trademark owned by National Bank of Canada (NBC) that is used under license by NBF. NBF is a member of the Canadian Investment Regulatory Organization (CIRO) and the Canadian Investor Protection Fund (CIPF), and is a wholly owned subsidiary of NBC, a public company listed on the Toronto Stock Exchange (TSX: NA). The information contained herein has been prepared by Eric Van Enk, Associate Portfolio Manager and Wealth Advisor at NBF.  I have prepared this article to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The opinions expressed herein, which represent my informed opinions rather than research analyses, may not reflect the views of NBF. The opinions expressed are based on my analysis and interpretation of historical data. Values and returns will fluctuate, and past performance is not necessarily a guarantee of future performance. The particulars contained herein were obtained from sources I believe to be reliable but are not guaranteed by me and may be incomplete. The opinions expressed are based upon my analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The securities or sectors mentioned herein are not suitable for all types of investors. Please consult your wealth advisor to verify whether the securities or sectors suit your investor's profile as well as to obtain complete information, including the main risk factors, regarding those securities or sectors.

Contact us

Get contact information for our team members and find out where our offices are.