The equity market is not the economy” has rarely rung so true.
In the last two quarters the US labour market has softened considerably. In contradiction to labour market weakness are contemporaneous measures of US GDP. This shows a US economy reaccelerating. A divergence between labour force growth and GDP growth is unusual and was not expected.
Given the moribund US labour market data, we retain a defensive view and something approaching a 50% probability of a US recession in the next 12 months. Even though labour market frailties are hard to shake, if GDP momentum carries through to 2026, we are likely to further downgrade US recession risk in 2026.
The next few US monthly payroll reports are significant.
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