The unemployment rate is rarely the canary in a slump coal mine

The January jobs report came with a sharp rise in payrolls last week and the unemployment rate dropping to a level not seen in over 50 years.

This has led to talk of a soft landing, but Deutsche Bank says not so fast.

"The issuance will definitely reduce recession risks across the board in the first half," said Jim Reid, a strategist. We've always felt that the first half of 2023 was a bit early for a recession to start in the US, given the usual policy lag and the savings surplus still high, and this data may help support that view.

“However, does a strong labor market now reduce the risk of a recession starting later in the year? It does on face value, but history suggests you get little warning of a weak labor market before it starts to unravel.”

The chart below shows unemployment 6 months before a recession in the US, one month before, the first month of a recession and then the last month.

"In the six months leading up to a recession in the United States, the unemployment rate was flat on average," Reed said. "In an average recession that lasts about 9 months, the average rise in unemployment is 3 points. So recessions tend to be nonlinear events."

“Is this time any different? Employment clearly remains very high which the bulls would argue would help prevent unemployment from rising sharply in any slowdown. Businesses may also be tempted to hoard employment given how difficult it will be to re-hire post-Covid.”

"But the test will come if and when a recession hits and profits fall," Reed said. "Then we will see if this time is different for the labor market."

Find out what Goldman Sachs expects for the S&P (SP500) (NYSEARCA:SPY) (IVV) (VOO) (SPLG) in a hard bearish situation.