September’s jobs report contained a sign that investors should be on alert for a U.S. recession, judging by bond guru Jeff Gundlach’s favorite warning signs.
During a panel discussion at the New York Historical Society back in May, the Doubleline Capital LP chief executive officer revealed that one of his top three recession indicators was when the unemployment rate breaches its 12-month moving average.
September’s non-farm payrolls report showed that the unemployment rate in the U.S. ticked up to 5 percent, while the 12-month moving average held steady at 4.9 percent:
Over the past year, the trend in the unemployment rate has flipped from improving to deteriorating.
“This indicator is a necessary, but not sufficient, sign of a coming recession,” wrote Gundlach in an email to Bloomberg. “It is worth factoring into economic analysis but not a reason for sudden alarm.”
Here’s what he had to say about the evolution of the unemployment rate five months ago, in a statement that proved perfectly prescient.
“The bad news is it’s going to go above its 12-month moving average with a high likelihood in September,” something that puts us “on alert” for a recession, he said.
The good news, however, is that indicator has given false positives before (most recently near the end of 2010), and there’s another metric that has much more predictive power, according to Gundlach.
We know we’re in big trouble once the quarterly unemployment rate breaches its three-year moving average, something that doesn’t look to be in the cards any time soon.