On April 11, 2014, when the unemployment rate was pegged at 6.70%, we said the following:
Given our prior experience with Dow Theory and downside projections, any decline in the unemployment rate below 5.87%-5.90% would be exceptional with only the 4.40% and 3.80% levels as mere reflections of an overextended economic boom which should be followed by an equally impressive bust.
At the time, we had projected that the unemployment rate would fall to at least 5.90%. Based on the reported data, we are indicated to be as low as 4.70%.
Where To From Here?
All that is left is for the unemployment rate to fall to 4.40% and 3.80%. What is the constant challenge to any rising or declining trend? Getting old and tired. The manifestation of the declining trend getting old and tired is best represented in the percentage rate of change over the previous year. When the trend starts on the path of a decelerated rate, you have a fair idea of what is coming.
Looking at the chart above, we can see the percentage change from a year ago since 2007. We have highlighted the “zero rate of percentage change” over the previous year in red as this is the inexorable direction that markets express exhaustion. Once at this point, “zero rate of percentage change” over the previous year, the expectation should be that there is little room for another move to the downside AND SHOULD go to the opposite extreme.
However, expectations and reality are two completely different things. Looking at the exact same data since 1949, as posted on the St. Louis Federal Reserve website, we can see several points in time (listed below) where the rate of decline in unemployment achieves exhaustion and then makes another attempt at the previous rate of decline.
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May 1952
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May 1956
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January 1963
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March 1967
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February 1977
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June 1985
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November 1995
The end of the decline in the unemployment rate is near. However, what we’re curious about is whether there will be a last ditch decline before accelerating to the upside.
Whether the decline in unemployment ends shortly or has a last gasp, as in the past, we can confidently say that now is the time to prepare for the inevitable slowdown in the economy. This means servicing and paying off debts and shoring up the savings accounts.