Red light is on! Citi warns: the US job market has signaled an impending recession

Despite the improvement in the August non-farm payrolls report compared to the previous month, it did not alleviate Wall Street's concerns about an economic recession, even as the Fed is set to begin cutting interest rates. The U.S. economy added 142,000 jobs last month, below expectations, with the unemployment rate dropping to 4.2%. The private sector added 118,000 jobs, but the three-month moving average fell below 100,000. A team led by Citigroup research analyst Andrew Hollenhorst stated that this is the worst three months for the private sector since 2012, excluding the period during the pandemic. Meanwhile, the unemployment rate has risen by nearly a percentage point from its low point, Hollenhorst added in a report last Friday, indicating that what was once seen as temporary layoffs have now become the norm. He wrote, "From various labor market data, it is clear that the employment market is cooling, consistent with the typical pattern before an economic recession." Hollenhorst and his team further highlighted in a follow-up report last Friday the private sector's three-month average falling below 100,000 new jobs, a pace typically seen only during economic recessions. More concerning is the revisions to previous employment reports, showing an overestimation of an average of 70,000 jobs per month. He said, "The latest data makes us more convinced that the U.S. economy is at least heading for a significant slowdown (more likely a recession), but how the Fed will respond to the deteriorating outlook remains uncertain." He added that Citigroup's baseline scenario is for the Fed to cut rates by 125 basis points this year. The report points out that other signs of an economic recession include slowing auto sales and weak home purchases, despite recent declines in mortgage rates, housing purchases remain sluggish. Hollenhorst has been a "contrarian" this year, maintaining a pessimistic view of the U.S. economy even as the Wall Street consensus shifts towards a soft landing. In July, he predicted that the Fed would cut rates by 200 basis points by mid-2025 as the economy heads for a more significant downturn. In May, he again warned that the U.S. was heading for a hard landing, with Fed rate cuts insufficient to prevent such a scenario. This aligns with similar forecasts in February, when there were even strong jobs reports. Economists point out that while initial jobless claims are down, corporate profits are strong, GDP data and expectations are robust, retail sales are optimistic, and wages are rising, the market consensus has not shifted towards a recession. However, elsewhere on Wall Street, analysts have issued warnings of other recession indicators. Last Friday, Interactive Brokers senior economist Jose Torres noted that the yield curve has un-inverted, a signal that has preceded every economic recession since 1976. The yield curve inversion has been a reliable recession indicator, as it indicates that investors see greater risks in the near term. The U.S. yield curve was inverted for about two years until recently reversing, but this does not mean the economy is out of the woods Torres warned, "In fact, after a long period of negative spreads, the 2-year and 10-year US Treasury bond yields have turned positive again, which historically is a sign of an economic recession."