Wall Street believes the likelihood of a recession is minimal, but a pessimistic analyst argues that this chart suggests the opposite.

Labor Market Signals and Recession Risks

• Recent labor market data indicates that a recession could still be possible this year.

• Albert Edwards of Société Générale notes that unemployment rate patterns have historically anticipated economic downturns.

• On a positive note, despite slow hiring and fewer job openings, both consumer spending and GDP remain robust.

Concerns about a recession have eased lately as the US economy continues to show strength—especially with impressive GDP figures and the Federal Reserve’s recent interest rate cuts.

However, a chart highlighted by a cautious analyst this week may give investors reason to reconsider.

In a client update, Albert Edwards of Société Générale shared a chart displaying the US unemployment rate (in red) alongside its three-year moving average (dotted line). Since 1950, every time the unemployment rate has started to climb and surpassed its three-year moving average, a recession has followed—eight times in total.

Edwards commented, “The biggest risk to stocks is a recession, even though in recent cycles, financial instability has often come before or triggered downturns. No major analyst is currently predicting a recession in 2026, but the correlation shown here has been accurate every time.”

This chart reflects the logic behind the Sahm Rule Recession Indicator, which states that a recession is signaled when the three-month average unemployment rate rises by more than 0.5% from its lowest point in the previous year. Essentially, a rapid increase in unemployment is a warning sign for the economy.

Although this indicator had been praised for its reliability since its introduction in 2019, it gave its first incorrect signal in August 2024.

It is still uncertain whether the job market will deteriorate significantly, as Edwards’ analysis suggests. While hiring and job vacancies remain subdued, other key economic indicators—such as consumer spending and GDP growth—are still performing well.

Edwards also points to another potential warning: a steepening Treasury yield curve after an inversion. Historically, declining short-term rates after an inversion have been linked to weakening labor markets and consumer activity. However, the current economic environment appears more resilient than in past cycles.