Deutsche Bank: Non-farm "cliff-like" turning negative is the beginning of economic recession

The U.S. added 142,000 non-farm jobs in August, lower than the expected 165,000, with the previous value also significantly revised downward, adding to signs of a slowdown in the labor market. As expectations for a rate cut in the U.S. rise, concerns about an economic recession are intensifying (source).

However, some believe that a "cliff-like" turn to negative in non-farm jobs is the beginning of an economic recession. On September 6, Deutsche Bank released a research report where strategist Jim Reid discovered a clear pattern when reviewing the 13 economic recessions in the U.S. since World War II: the start of an economic recession usually highly correlates with the month when (non-farm) employment data first turns negative. The chart below illustrates this:

Chart 1: Median path of non-farm job growth 12 months before and after the onset of economic recession since 1945 (0 = the first month of recession) - typically, the first month of recession shows a non-linear change leading to negative non-farm job data.

Reid says there is no need to worry as long as monthly job additions remain above 100,000: "If we can maintain job additions of over 100,000 each month, then we can pass the worry to the next month."

Reid believes that the current employment data has not yet reached the level to trigger a recession, but he also acknowledges that recent employment data suggests a continued slowdown in the U.S. economy. This week, a series of employment and economic data in the U.S. remained weak: ADP job additions fell to over a 3-year low, initial jobless claims were poor, manufacturing PMI unexpectedly dropped, among others. In his report, he wrote:

The good news is that we have not reached this level in the current economic cycle. The slowdown in employment last month may have been mainly due to adverse weather conditions. The bad news is that several (but not all) employment indicators suggest that the economic slowdown is continuing.

What is more concerning is that when job additions turn negative and an economic recession arrives, it often comes without warning, signaling the start of an economic downturn cycle. Reid wrote:

More importantly, the chart shows that when negative growth first appears, it often comes without warning and this is often the beginning of a downward trend. This means that we cannot derive too much comfort from past data because this change is often non-linear and there are no clear signs in the first few months.

It is worth noting that earlier this week, Jim Reid also put forward another point of view: The end of the "inversion" of U.S. bonds has a certain predictive effect on an economic recession.

Deutsche Bank strategist Jim Reid stated that economic recessions often begin when the yield curve returns from an inverted state, in fact, this has been the case in the past four economic recessions

This Wednesday, the 2-year US Treasury bond yield fell below the 10-year Treasury bond yield, ending the 26-month inverted yield curve. In the financial markets, the "interest rate-sensitive" US Treasury bond yield curve has always been seen as a leading indicator of economic recession