As we close out the third quarter of 2024, the Enki Recession Index (ERI) continues to signal significant concerns about the state of the U.S. economy. With a September ERI reading of 95.1%, this marks the third consecutive month that the index has crossed the 90% threshold. Historically, this reading has been an accurate predictor of recession, and the current combination of economic indicators suggests we are either already in a recession or on the cusp of one. Let's explore why the ERI is signaling such a high risk and what the implications are for the economy.
ERI: The Numbers That Matter
The Enki Recession Index aggregates three key economic indicators to give a reliable prediction of recession risk:
Unemployment Rate: September saw a slight dip to 4.1% from the previous month's 4.2%. While this looks like a positive development, it’s likely due to seasonal hiring in industries preparing for the holiday season. This temporary improvement could mask deeper issues in the labor market.
Yield Curve (YC): The yield curve remains weak at 0.13, signaling investor caution. Although not fully inverted, this spread indicates long-term economic concerns. Historically, yield curve inversion has preceded recessions, and the current low yield spread reinforces the risk of a downturn.
Manufacturing PMI: The Purchasing Managers’ Index (PMI) came in at 47.2 for September, indicating contraction for the 23rd time in the last 24 months. This ongoing contraction reflects the struggles faced by the U.S. manufacturing sector due to supply chain disruptions, rising input costs, and declining demand for goods.
Unemployment Rate: A False Signal of Stability
At 4.1%, the unemployment rate appears stable, but the context tells a different story. Seasonal hiring in retail, logistics, and related industries has temporarily boosted employment numbers. However, the Sahm Rule, which signals labor market stress when the unemployment rate rises by 0.50% from its lowest point over the past 12 months, remains triggered. The 3-month moving average of unemployment is 4.2%, compared to a 12-month low of 3.7%. This confirms underlying labor market stress.
Once the holiday season ends and seasonal workers are let go, we expect the unemployment rate to rise, likely bringing the true labor market challenges into clearer focus by early 2025.
Yield Curve: A Persistent Signal of Trouble
The yield curve has been flashing warning signals for months, and while it’s not fully inverted, its weakness at 0.13 is a strong indicator of future economic trouble. An inverted yield curve has historically been one of the most reliable predictors of a recession. Investors are flocking to long-term bonds, indicating a lack of confidence in near-term economic stability.
The yield curve’s persistent weakness is telling. Even without a full inversion, a weak curve reflects broader concerns about long-term economic growth. If the curve continues at this level or worsens, it’s likely to confirm that a recession is on the horizon.
Manufacturing PMI: A Sector in Long-Term Decline
The U.S. manufacturing sector continues to struggle, as evidenced by the Manufacturing PMI, which has been contracting for 23 of the last 24 months. The September PMI of 47.2 is well below the critical 50-point threshold that separates expansion from contraction. Manufacturing has been under pressure from multiple directions: supply chain challenges, inflationary input costs, and weakening global demand.
This prolonged contraction in manufacturing suggests structural weakness that extends beyond temporary market disruptions. Historically, manufacturing serves as a leading indicator for the broader economy, and the sector’s struggles indicate that we could be heading into a deeper economic slowdown.
M2 Money Supply: Feeding Inflation and Debt
The M2 money supply—a measure of the amount of money circulating in the economy—has grown significantly in recent years due to Federal Reserve interventions during the pandemic. This influx of liquidity was necessary to stabilize the economy during the crisis, but its continued growth is now contributing to inflation and long-term economic risks.
With the recent 0.5 basis point rate cut in September and the likelihood of another rate cut in November, the M2 supply is expected to increase further. While lower rates stimulate borrowing and spending, they also inject more liquidity into the economy, diluting the value of the dollar. The government is continuing to spend heavily on domestic programs and foreign aid to Ukraine and Israel, contributing to the growing U.S. national debt.
The Housing Market: A Bubble That Won’t Burst?
The housing market remains a major area of concern. With home prices continuing to rise, driven by low supply and increasing demand due to falling interest rates, the market is becoming less affordable for the average American. The 0.5 basis point rate cut in September has made borrowing cheaper, which in turn has boosted demand for housing. However, this demand is not being matched by an increase in supply, which is pushing prices even higher.
Institutional investors and hedge funds are also playing a significant role in driving up housing prices. These large players have been purchasing properties in bulk, reducing the available inventory for individual buyers. The result is a housing market where prices continue to soar, leaving many Americans priced out and contributing to a growing wealth gap.
Government Debt: A Ticking Time Bomb
Another key issue exacerbating the economic situation is the U.S. national debt, which is now at record levels. The federal government has borrowed heavily to fund pandemic relief, infrastructure projects, and foreign aid, but this borrowing is unsustainable in the long run. With interest rates expected to stay low, the cost of servicing this debt is likely to increase, diverting more funds away from critical public services.
The combination of high debt levels, a weak yield curve, and rising inflation creates a perfect storm for long-term economic instability. If investor confidence falters and the U.S. government is unable to manage its debt load, the economy could face a more severe crisis down the line.
The Reality: A Looming Recession
Looking at individual indicators, some may argue that the economy isn’t in terrible shape. The unemployment rate has remained relatively stable, and consumer spending continues to drive economic growth. However, when we examine the Enki Recession Index (ERI) and consider the broader context, it’s clear that we are in a very bad place economically.
The ERI’s historical accuracy in predicting recessions cannot be ignored. There has never been a time when the ERI crossed 90% and the U.S. economy did not enter a recession. The combination of labor market stress, a weak yield curve, and a contracting manufacturing sector paints a bleak picture for the coming months. While seasonal hiring may be providing temporary relief, it’s likely masking deeper issues that will become apparent in early 2025.
What’s Next? Preparing for Impact
The data tells us that a recession is likely, if not already underway. With M2 growth fueling inflation, a strained labor market, rising housing prices, and an unsustainable national debt, the U.S. economy is on the brink of a downturn. The question is no longer if a recession will happen but rather when the full impact will be felt.
For individuals and businesses, now is the time to prepare. Reducing discretionary spending, building up emergency savings, and diversifying investments are key steps to weathering the economic storm ahead. For policymakers, the focus should be on managing inflation, controlling government debt, and addressing structural issues in key sectors like manufacturing and housing.
What does this mean? The ERI Doesn’t Lie
The September 2024 ERI reading of 95.1% is a clear warning sign that the U.S. economy is heading into dangerous territory. While some economic indicators may offer a sense of stability, the underlying data suggests that we are already experiencing the early stages of a recession. The Enki Recession Index has historically been accurate, and the current reading leaves little room for doubt: the U.S. economy is in a very bad place.
Stay informed, stay prepared, and follow the latest updates at Enki Insights as we continue to monitor these economic developments closely.
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