There aren’t many things about a good economy that are alarming.
After all, it’s the good times. We are making more money, everyone seems to stay employed and there’s not much to complain about when it comes to our economy.
But when things begin to be too good, caution flags start to shoot up in areas you may not suspect.
Right now, unemployment is at the lowest level since 2000, around 3.9%. Before that, it wasn’t this low since 1970.
We are in a period of historically low unemployment.
And when you look at how high unemployment was during the financial crisis, hitting 10% in October of 2009, it’s a massive decline in less than a decade.
To put that in perspective, after the recession from the tech bubble in the early 2000s, unemployment fell from 6.3% to 4.4%.
Take a look:
As you look at the chart, a few things should stand out.
One is that unemployment is cyclical. It doesn’t stay flat long and is either trending lower or surging higher.
That’s clear going back to the 1940s.
But — and this is what scares me — low unemployment always precedes a recession.
In every case where there is a recession on the chart, indicated by the gray shaded areas, unemployment is declining before it begins.
Even from 1980 to 1981, when we had recessions back to back, we still saw the unemployment begin to improve.
Every other recession is perfectly clear: Low unemployment eventually leads to the next recession.
It’s not a matter of if there is going to be another recession, it’s when.
And right now, with unemployment at historically low levels, that could come sooner than later.
I still am looking for a recession to begin in 2020, or at least a year from now. But unemployment is the one chart that scares me when it comes to the next major recession.
Chad Shoop, CMT
Editor, Automatic Profits Alert