March 1st, 2024

Economics 101: Increase in unemployment rate signalling a U.S. recession

By Eric Van Enk on December 30, 2023.

Source: National Bank Financial

Our final chart of the year highlights U.S. unemployment which has begun to increase from recent lows. Throughout 2023, the U.S. economy generally outperformed expectations, driven by higher consumer spending which represents approximately two-thirds of the U.S. economy.

The U.S. consumer continued to spend despite having to endure higher interest rates by drawing down excess savings accumulated during the COVID pandemic. The key question now is, will interest rates be lowered before U.S. (and Canadian) consumers dramatically decrease their spending?

In the supplied chart which tracks U.S. unemployment rates back to 1968, the red line represents the three-month average U.S. unemployment rate while the blue line shows the change in the unemployment rate from recent lows. Grey bars represent U.S. recessions.

The current increase in unemployment from recent lows has reached the level (~0.3%; red dotted line) which has been a leading indicator for prior U.S. recessions.

As you can see, an increase in the unemployment rate of this magnitude has signaled the start of each of the last eight recessions since 1968, without exception and without false signals.

Stated slightly differently, every time we’ve seen the U.S. unemployment rate increase by more than one-third of one percent from its recent lows, a recession has followed. You will also notice that once the increase in unemployment has crossed this threshold, it continues to increase (more job losses) until the end of the recession (grey bars).

The reason this matters for investors is stocks are likely to perform very differently next year if the U.S. experiences a recession compared to if a recession can be avoided. Historically, the U.S. stock market (ie – S&P 500) performs very poorly during a recession. The average sell-off from peak to trough for the S&P 500 over the past seven recessions is 35.8%.

The smallest sell-off for the S&P 500 during a U.S. recession was 17.1% in the late 1970’s while the largest recession sell-off (56.8%) occurred during the Global Financial Crisis of 2008.

Conversely, history suggests the U.S. stock market could continue to experience positive returns in 2024 if a recession is avoided. We will continue to closely monitor U.S. unemployment data and its implications for a recession in the U.S. next year.

Wishing you and your family a very Happy Holidays and we hope you have enjoyed reading our articles over the past year.

Eric Van Enk is a wealth adviser & associate portfolio manager with National Bank Financial in Medicine Hat. He is a graduate of the University of Calgary, as well as a CFA charter holder with 20 years of financial markets experience in New York, Toronto and Calgary. He can be reached at

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