Does a slowing economy mean a recession is around the corner?

Fed Chairman Jerome Powell said the economy was “healthy” and conditions “favorable” but warned of potential headwinds and future challenges in his comments to a Senate committee on Tuesday, February 26th (the Senate Committee on Banking, Housing and Urban Affairs). Powell noted Brexit and China trade negotiations as possible concerns for the economy, as well as public debt as watch areas. The next day at the House Financial Services Committee, Powell said the economy grew at a “strong” pace last year, but in the last few months some data has “softened.”

There are other red flags for the economy. The stock market has become more “volatile” and current economic conditions are less “supportive” of growth. Retail sales unexpectedly fell in December, which has dis-proportionally hit retailers expecting the year-end holiday gains. More retail businesses are going bankrupt, and this is driving further layoffs. Consumer and business confidence fell to its lowest value in a year and a half. Economic growth is certainly declining, and GDP is on track to be the lowest in the last four quarters.

The unemployment rate grew to 4% in January, and seeing that this is 0.3% higher than the business cycle low of 3.7% in November of last year, this is indicating a path towards a potential recession. An article this week by Patti Domm on CNBC.com states that over the last 70 years, if the unemployment rate goes 0.5% higher than the most recent low, then the economy will enter or is already in a recession, regardless of what the unemployment rate is. This predictor is 100% accurate since 1948, when the government started keeping records of the unemployment rate. Which means, once the unemployment rate hits 4.2%, we will be in a recession.

Looks like all eyes should be on the unemployment rate…