Unemployment rate only a tenth of a point from a recession: Economist
Calls of a global economic slowdown and U.S. recession risks are swirling into the perfect storm as officials continue to keep a close eye on economic prints. FWDBONDS Chief Economist Chris Rupkey and Sonali Pier, PIMCO Managing Director and Portfolio Manager, join Yahoo Finance Live to discuss U.S. recession forecasts.
"For a recession to be a recession is the unemployment rate needs to rise 0.5 percent points from the low, and that pretty much almost every time, except one since the 70s, meant we were in a recession," Rupkey explains. "There's reasons to believe that 3.8 last month won't stick."
Pier outlines the best portfolio and sector strategies investors should keep in mind amid recession risks.
Video transcript
- What do you think is the biggest risk to this sort of growth optimism, or at least not recession optimism, that has come back into market perception here?
Well, I'm a little bit worried that geopolitics, or at least politics down in Washington, are going to come back and bite us on the behind before we get through the end of the year. Let's not forget, I don't think a federal government shutdown is off the table at the moment, and there could be some adverse headlines about that coming forward.
Other than that, a recession. Economists track record at forecasting a recession are pretty dismal to say the least. The problem with a recession is that all of a sudden the economy just goes vertical. Everything looks like it might be a recession, but all of a sudden, these things, it just falls away. And there's no indication at the moment, trying to peer around the corner, that we're going to see massive job losses that would mean the economy was falling away quickly.
- Well, Chris, that's been one area that we haven't seen too much of a turnover, although we did see a slight move higher in the unemployment rate in this most recent monthly jobs report. A lot of economists are saying that that needs to get to upwards of 5% in order for us to really say, or kind of signal, that a recession is either something that we're in the midst of or something that is impending. And so with that in mind, where has the Fed-- where are they continuing to kind of monitor for cracks in the labor market right now?
CHRIS RUPKEY: Well, I mean, sitting around on a trading desk, decades ago, we didn't have much to do as a trading floor economist. And one of the things we noticed, that for a recession to be a recession is the unemployment rate has to rise 0.5 percentage point from the low, and that pretty much, almost every time except one since the '70s, meant we were in a recession. Job losses define a recession.
So I know I've said we can't see a recession coming at the moment but that's a little ironic after the unemployment rate lifted from 3.5 to 3.8. Anyway, at the moment, the low for unemployment was 3.4, now we're at 3.8. We're at 0.4 percentage point. We're really only a tenth away from indicating a recession. But there's reasons to believe that 3.8 last month won't stick.
- And Sonali, there's what we think and say about whether recession is coming, and there's what people are actually doing with their money. You told us that you're seeing clients de-risk to some extent. Why are they doing that, and what does that look like?
[INAUDIBLE] equities have performed very well, year-to-date, and when you look at the starting level of yields and the income that it produces in fixed income, when looking at that asset class versus equities, we're at a point where we haven't seen this relative value in some time. And bonds are looking very attractive given where the 10 year rate is, for example, in treasuries.
But then also even adding on some credit spread to enhance yield. This level of income is quite-- can lead to long term equity-like returns through fixed income investing.
- OK. And so with that in mind, are there other areas where investors should be keeping an eye on for or perhaps rotating out with some of the risks that are present right now, Sonali?
SONALI PIER: Yeah. You know, I think there's still uncertainty out there even if, in a recession, timing and probabilities have either declined or extended. The reality is that within fixed income, there's a lot of opportunity to have high single digit returns.
And doing so, for example in agency mortgages, this is an area where it is highly liquid and is providing opportunities that we haven't seen in quite some time as a result of one of-- the Fed no longer being a borrower-- sorry, investor there, in terms of, especially, we find more attractive the high coupons that are-- versus the low coupons that the Fed was in.
Other areas include some for high quality returns in investment grade where default is quite remote. Even some high quality parts of high yield look still attractive when you think about, call it, the yield that we have today, and reasonable technicals as at least at the moment. And fundamentals where-- while we have seen some deterioration, they've started from pretty robust levels.
