US unemployment rate jumps

The BLS (Bureau of Labour Statistics) has produced new estimates for labour market data for November.  Because of the government close-down, there are no October numbers, so I have interpolated the gap.

This is the unemployment rate:

Observe how the unemployment was rising (in other words, the economy was weakening), then started to fall in the second half of 2024, before rebounding again after January.  The last time it was this high was in 2021 as the economy recovered from Covid.

If you take the change in the unemployment rate, it is strongly negatively correlated with the state of the economy: when the economy advances, the unemployment rate falls, and vice versa.  The chart below shows the change in the unemployment rate, inverted, so the line in the chart falls when unemployment is worsening, and rises when it is improving.  I have done this so it is consistent with the direction the overall economy is moving in.  

So, through 2023 and the first half of 2024, we can deduce that the economy was deteriorating, then it started to improve, before once again worsening after Trump's tariff débâcle. 

How does this look compared with a completely different indicator of the economy?  I have used the whole-economy ISM (service plus manufacturing) as a good proxy to the state of the economy, and put the change in the unemployment rate and the ISM on the same chart.   Note how the whole-economy ISM slightly leads the change in the unemployment rate.

The ISM has had a small rebound since June, but looks as if it might have peaked.  This means that the change in the unemployment rate might also have peaked, temporarily.  That does not mean that the unemployment rate will start falling--it may well just go sideways for a couple of months.

Indicator after indicator gives us the same pattern:  a nascent recovery as the economy shrugs off the previous rise in interest rates, and starts to respond to their fall; a recovery which aborts as Trump's tariff mess cuts economic activity and reduces confidence.

The chart below shows this pattern too.  It is my private sector data index, which I constructed when official government data were not being produced, but which I have found useful even now that data are being made available again.  The chart shows the year-on-year change in this index.  Note the peak in late 2024, and the slump since then.

The data are unambiguous:  the US economy is slowing.  Whether it goes back into recession isn't clear, but at the least there will be stagnation.   The markets are convinced that the Fed will cut rates again, which I think is very likely.  However, this market belief is not leading to falling bond yields and rising stock markets as it normally would, but instead to a falling US dollar and surging precious metal (gold, silver, platinum and palladium) prices, suggesting that the markets also think that inflation is going to be trending up.  In a word: stagflation.

Precious metals rising as risk increases

Precious metals (gold, silver, platinum and palladium)  are used to make things, like other commodities, but they are also stores of value.  During crises, the prices of precious metals rise.

In the chart below, you can see the index for the average of precious metals prices, daily since 2000.  Note how the index falls during recessions, and rises during recoveries  (the 2001 recession, the 2008 GFC, the slowdown in 2016 before the Trump tax cut sugar-hit sparked a recovery, ended by the covid crash.)

Click on chart to see clearer image 

However, shorter term, you can clearly see how other factors than demand have impacted prices.  The covid plunge (early 2020) is obvious, the rebound in response to massive fiscal and monetary stimulus is clear, up until H1 2021.  Then the index falls as interest rates are raised, followed by a spike in response to Russia's invasion of Ukraine.  Notice how over the last couple of months, the index has been rising, as concerns about the safety of the global banking system grow.   Other commodity prices are declining on average, as the world economy slows, yet precious metals, which in the longer run tend to follow the broader economic cycle, are rising. 

Click on chart to see clearer image.