Deteriorating labor market points to impending recession, says BCA Research By Investing.com

The continued deterioration of the US labor market is a signal that a recession is imminent, BCA Research said on Monday. This view places the firm in the minority, with investor consensus anticipating a soft landing.

According to BCA Research’s latest strategy report, the labor market has deteriorated significantly in recent months, prompting the firm to take a defensive stance four weeks ago.

“There has never been a case in the post-war era where the three-month moving average of the unemployment rate has risen by more than a third of a percentage point without a recession,” the BCA pointed out.

The report highlights some worrying trends in the labor market. Small business hiring intentions have declined, temporary employment remains weak, and initial jobless claims are rising.

These signs, combined with persistent declines in key metrics in the JOLTS survey, were enough for BCA to close in on stocks in early August.

“I became tactically defensive four weeks ago as the labor market deteriorated enough to portend a recession. Investors should use the post-August 5 pullback to reduce exposure to risk assets,” the note said.

“The risk/reward of defensive positioning looks more attractive than aggressive positioning amid weakening fundamentals and ambitious expectations.”

The BCA also points out that consumer behavior is unlikely to support the economy as it did during the pandemic.

While households still have some spending power, largely due to savings built up during the pandemic, the BCA notes that “neither their resources nor their spirits are inexhaustible.”

Additionally, with banks tightening lending standards for eight consecutive quarters and consumer delinquencies on the rise, the outlook for future earnings is bleak.