Deterioration in labor market indicates recession is imminent, says BCA Research

The ongoing deterioration in the U.S. labor market is a signal that a recession is imminent, BCA Research said Monday. This view places the firm in the minority, with the investor consensus anticipating a soft landing.

According to BCA Research’s latest strategy report, the labor market has frayed significantly over the past few months, pushing the firm to adopt a defensive stance four weeks ago.

“There has never been a case in the post-war era where the three-month moving average of the unemployment rate has risen by more than one-third of a percentage point without a recession taking place,” BCA pointed out.

The report highlights several concerning trends in the labor market. Small business hiring intentions have declined, temporary employment remains weak, and initial unemployment claims are on the rise.

These signs, combined with persistent softening in key metrics from the JOLTS survey, were sufficient for BCA to turn defensive on equities as of early August.

“We turned tactically defensive four weeks ago, as the labor market frayed enough to portend a recession. Investors should be using the post-August-5th bounce to reduce risk asset exposures,” the note states.

“The risk/reward of defensive positioning looks more appealing than aggressive positioning against a backdrop of weakening fundamentals and ambitious expectations.”

BCA also points out that consumer behavior is unlikely to sustain the economy as it did during the pandemic.

While households still have some capacity to spend, largely due to savings built up during the pandemic, BCA notes that "neither their resources nor their spirit is inexhaustible."

Moreover, with banks tightening lending standards for eight consecutive quarters and consumer delinquencies on the rise, the outlook for future income is bleak.

Source: Investing.com