Famed Hard-Landing Indicator Flashing Red

• A handful of indicators suggest a hard landing is underway, warned leading economist David Rosenberg.
• A well-known labor market recession indicator shows levels similar to those of the last three recessions.
• But those could be lost on investors, who remain bullish on stocks and the economy.

The economy is flashing a handful of warning signs that a recession could be on the way even if investors betting on a continued stock rally don’t believe it, according to economist David Rosenberg.

The Rosenberg Research founder pointed to several warning signs that the U.S. could be on the brink of a slowdown, even though the economy appears strong on the surface. In particular, he discussed the Sahm rule, a famous recession indicator that flashes when the three-month moving average of the U.S. unemployment rate rises 50 basis points from its 12-month low.

When triggered, the Sahm rule has always been a very accurate indicator that the economy is in the early stages of a recession. According to its creator and former Fed economist Claudia Sahm, her rule has correctly qualified every recession since the 1970s, and while it doesn’t show the economy is in recession yet, it’s only at 20 basic points to achieve this, according to the latest report. job data.

This level is similar to that shown by the Sahm rule before the recessions of 2001, 2008 and 2020, Rosenberg noted.

“The various leading recession indicators stubbornly cling to the idea that a recession is very likely in the coming year. Yet, based on our quantitative analysis, the equity market and credit sector “Investment grade, high yield corporate grades are rated at 0%.” Rosenberg said in a note Monday. “Delay does not mean derailment,” he added of a recession.

Rosenberg pointed to other recession warnings that go unnoticed. Short-term Treasury yields factor in a near 100% probability of recession over the next 12 months, he noted, citing data from the Fed and Haver Analytics.

The yield curve, another notorious recession indicator in the bond market, incorporates about a 60% chance of recession.

But those risks appear lost on investors, who have warmed to the possibility of a soft landing as stocks continue to climb and the Fed appears poised to cut interest rates later this year. 47% of investors feel optimistic about stocks over the next six months, according to the latest AAII Investor Sentiment Survey. At the same time, markets estimate a 49% chance that the Fed’s first rate cut will come as early as June, according to the CME FedWatch tool.

Rosenberg is among the most pessimistic forecasters on Wall Street this year and has been calling for a recession for months. Recently he said a recession was now four times more likely than an economic expansion. This is due to a host of “understated” indicators that show the economy is weaker than it appears on the surface, suggesting stocks are at 39% risk of a crash, a- he predicted.