The chart that 'terrifies the Fed'

The Federal Reserve is increasingly concerned about stalling U.S. employment, as a key indicator—the six-month change in core payrolls (excluding government and healthcare jobs)—is at an unprecedented 0.02%. According to TS Lombard's Dario Perkins, this near-zero level has historically preceded significant employment contractions and NBER-defined recessions whenever it turned negative, potentially implying a loss of 1.5-2 million jobs if the trend reverses.

Analysis

A critical U.S. employment indicator is signaling a significant economic risk, raising alarm for the Federal Reserve. According to analysis from GlobalData TS Lombard, the six-month change in core U.S. payrolls, excluding government and healthcare, has decelerated to a statistically flat 0.02%. This near-zero growth is described as unprecedented. Historically, every instance of this indicator turning negative has been followed by a National Bureau of Economic Research (NBER) defined recession and a material contraction in employment of at least 1-1.5%. In the current context, such a contraction would equate to a minimum of 1.5 to 2 million job losses. The analysis further warns of a momentum effect, suggesting that once payrolls begin to decline, the trend typically accelerates, implying a risk of a discrete and substantial deterioration in the labor market should the indicator dip below zero.

Key Decisions for Investors

• Investors should closely monitor upcoming employment reports for the six-month change in core payrolls, as a negative print would act as a strong historical signal for an impending recession and a significant labor market contraction.
• Consider increasing allocations to defensive assets and reducing exposure to cyclical sectors that are highly sensitive to employment and consumer spending, given the heightened probability of an economic downturn.
• Re-evaluate interest rate expectations, as this severe weakness in a key labor metric could force the Federal Reserve to adopt a more accommodative monetary policy stance sooner than anticipated to mitigate a potential recession.