Why Record Low Unemployment Is A Sign Of Recession

Yesterday, I wrote a post mentioning how record low unemployment is a sign of a pending recession. This goes counter to what most people believe. The present mantra by the mainstream financial media talks about how strong the economy is by pointing to the employment numbers.

The challenge with this is the fact that historical data tells the exact opposite story.

When the unemployment number reaches historic lows, recessions ensue. This is a fact that goes back decades meaning it is not a small sample size.

Thus, the employment numbers are a lagging indicator as opposed to a leading one.

The reason why I decided to write this post is because someone asked me on Discord why this was. Hence, I figured it would be helpful to explain how this unfolds.

It all starts with investment capital. Before anything takes place with the economy, capital needs to be injected. Now, we need to make a distinction between investment capital and liquidity. Liquidity is money pumped into markets do not seize up. The theory behind central banks "priming the pump" is that money pumped in will turn into investment. Unfortunately for them, this is not always the case.

Investment that is injected into the economy eventually spreads throughout. Consider this the idea of "trickle down". In a healthy economy, investments of capital are made in businesses, plants, equipment, and an assortment of other functions such as R&D. At some point, this translates into more people being hired, thus pushing the jobs down.

As long as investments are made, we will see a continued improvement in the employment numbers. However, at some point, we see the investment of capital slow. When this happens, there is a time lag between when it stops and the effect on employment takes place. This is where the "lagging indicator" enters the picture.

So where are we at now?

In spite of the liquidity that is being pumped by central banks, the investment is drying up. We see this obvious fact in the United States. Very little money is being invested in traditional business builders. Instead, record low interest rates are enabling companies to borrow money cheaper than ever before. The challenge is, over the past few years, most of this money went to stock buybacks.

This is not investment per se. Instead, it is financial engineering which will not positively impact employment in the future.

Without the investment on the front end, where is the growth going to come from? The answer is nowhere. This is evident in the fact many of the Fortune 500 is seeing flat to negative revenues. The top line is not improving while the bottom number, EPS, is holding strong because of the aforementioned stock buybacks.

Once again, this is not an optimistic situation for employment.

Ultimately, we are seeing hundreds of billions of dollars being handed to Wall Street in the form of stock buybacks. This is starving the economy of investment capital. Some claim that the government spending makes up for it but, once again, it depends on how it is structured.

For example, $250B spend on infrastructure will have a positive impact since it can filter through the economy. However, other spending such as unemployment payouts is not an investment that goes through even though they could be necessary. This is why war historically has been good for economies since it does require the building of planes, ships, guns and bombs.

When I total all this up, I cannot help but to state that bad times are ahead of us economically. This is going to be a nasty crash considering the fact that the global debt levels are so elevated. The last 10 years are marked by a massive expansion of debt. Unfortunately, there is no way to create a "soft landing" when things start sliding.

There are rough times ahead for the present system. Hopefully people are getting prepared.

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