Deutsche Bank Flags Recession Warning as U.S. Payrolls Miss Expectations

Deutsche Bank's recent commentary has raised concerns about the U.S. economy, stipulating that a significant downturn in non-farm payrolls (NFP) numbers could be a precursor to an economic recession.
The U.S. Labor Department's data on September 6 revealed that while U.S. non-farm payrolls saw an increase of 142,000 in August, it lagged behind the market expectation of 165,000. This report also revised the figures for June and July downwards to 89,000 and 118,000 respectively, indicating a potential cooling in the employment market.
In August, the breadth of employment improved compared to July. While in July the health insurance sector contributed to 62% of the non-farm payrolls increase, August saw a broader increase across various sectors such as leisure and hospitality, healthcare services, and construction, contributing 46,000, 44,000, and 34,000 jobs respectively. In contrast, sectors like durable goods manufacturing, retail trade, and information services saw declines.
A critical observation was the fluctuation in manufacturing employment, which turned negative again with a decrease of 24,000 jobs in August. This was a reversal from a positive addition of 6,000 jobs in the previous month.
The household survey data also showed a minor recovery compared to July. The unemployment rate (U3) decreased from 4.25% to 4.22%. Yet, the permanent job losses showed a slight uptick, reflecting an overall increase in employment pressures.
Deutsche Bank's analysis suggests that the current rise in unemployment rates deviates from traditional economic cycles. The "Sahm Rule" indicates that if the three-month average of the unemployment rate exceeds the lowest three-month average of the past year by 0.5 percentage points or more, there's a higher recession probability. For June to August, this difference stood at 0.57 percentage points.
Complicating matters are structural changes post-pandemic, such as a significant increase in the labor force due to immigration and higher tolerance for remote work. This has led to more individuals, including those with disabilities, seeking employment.
Another significant point was the August wage growth, which saw a slight increase than expected, with hourly wages growing by 3.8% year-over-year, surpassing the forecast of 3.7%. This indicates a resilient consumer spending capability, especially among low to mid-income households.
The Federal Reserve's commentary by members like Waller suggested they interpreted current economic conditions as "solid" and downplaying signs of a recession. Waller emphasized the need for a cautious approach towards rate cuts, aligning with the broader market anticipations.
Following these employment data releases, market instruments showed mixed reactions, with 10-year Treasury yields slightly declining by 2 basis points to 3.70%, while the dollar index noted a subtle rise to 101.177. U.S. stock indices fell significantly due to the lack of stronger confirmation for rate cuts. For investors, it's crucial to understand that the broader implications might still unfold around policy decisions in the upcoming Fed meetings.