As you all know by now, one of the metrics that we have used to determine where exactly we are in the economic cycle in the US is the historically significant relationship between current unemployment and the 3 year moving average, which when they have converged in the past has indicated the beginning of a recession:
The lines had been converging at a fairly rapid pace, within about 0.06% or so, as unemployment levels had held steady at or near the 4.9-5.0% point, while the moving average continued to decline. Until yesterday's US data showed that unemployment had dropped to 4.6%, widening out the spread to about 0.9% :
We can analyze the unemployment data (participation rate of the labour force), but that doesn't matter so much in this metric (yet), because the likelihood of near-term recession has been reduced, but that does not mean that it has completely gone away either. As we say often, one month's data, that can often be fraught with revisions, does not a trend make. Be that as it may, the 3 year moving average (in purple above) continues to decline at a good clip, so we shall continue to monitor the monthly data as it progresses and the status of the economic cycle that it produces.
More importantly, it (the most recent unemployment data) does nothing to impede the US Federal Reserve from raising interest rates on December 14, in fact it gives them more reason. This plus the increase in longer rates (higher bond yields) will have longer-term implications on a highly leveraged global economy that is firing out on less than all cylinders at the moment.
The recession may not come next month or the one after that, but it's eventuality has not gone away either.
Now we move on to see what the Italian people want for their future and what that may mean for all of the Euro Area.
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Scott Tomenson,CIM Managing Partner, Chief Investment Strategist