Trader’s Narrative

What if we are already in a recession? That is the question this article from the NY Times raised over the weekend.

Of course, this is an unanswerable riddle since the only way we know how to identify a recession is through hindsight, when it ceases to matter.

“With the core inflation rate comfortably close to 2 percent, and the Treasury market begging for ease for over a year, if it turns out to be a recession, it will also be a policy error,” said Robert Barbera, chief economist of ITG.

Amen. I’ve been saying this for a while: Bond Market Screaming For Rate Cut - Fed Listening?

But what if there was a reliable way to know ahead of time? The article showcases two variables and demonstrates how in the past they have given accurate signs of an imminent recession:

The first chart shows the difference between the yield on two-year Treasuries and the Federal Reserve’s target rate for federal funds — the rate on loans between banks. In normal times, the Treasury rate is usually higher.

The second chart shows the six-month changes in the number of people with jobs, as reported by the Labor Department’s household survey. In a growing economy, with the labor age population rising, the number of jobs almost always increases.

Click to Enlarge Graph: