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Two years ago, like a little dictator, I issued a fiat: nobody likes turkey, and henceforth we shall not eat it at Thanksgiving. Instead, we shall eat lamb—a far more delicious food.

My wife is a reasonable person. She gently questioned my declaration: “I know you’re doing the cooking and that you have a strong point of view, but doesn’t your whole family like turkey?”

“No! Nobody likes turkey!” I confidently declared (again).

Wife: “Maybe you should ask them?”

I asked them. It turns out they still like turkey. A lot. Last year my sister-in-law ate the leftovers for long enough that I became worried about food safety in her home. I still prefer just about anything else to turkey, but the people have spoken.

Lately, I’ve been thinking about how we are all prone to overconfidence in our assertions, whether in the kitchen or the office.

Despite their generally weak track record of forecasting recessions (or, more accurately, failing to forecast them), and having gobbled for the past year about a downturn that never materialized, most economists now argue we needn’t worry. In the face of unemployment rising meaningfully over the past few months, they see further weakness, but most are adamant that we will avoid a recession.

Maybe they’re right and the economy gets a pardon. But given what’s already baked in, this would be pretty anomalous in historical context. A straightforward reading of the historical record suggests that the softening we’ve already seen in the labor market, let alone how much more is widely expected in the year ahead, will almost certainly lead to a recession.

If we do get a recession, home prices will probably decline, at least in real (inflation-adjusted) terms, if not also in nominal terms.

Today’s note is a quick-and-dirty analysis of the linkages between rising unemployment and recessions, and between recessions and home prices. The bottom line: like the splayed fowl you’ll likely desiccate in an oven for many hours today, it doesn’t look good.

Let’s talk turkey…

The Fed turned up the heat and now the economy is drying out

The Fed’s objective all along has been slower wage growth. This would almost certainly only be achieved with some jobs facing the chopping block. They got their wish(bone). The unemployment rate has risen by 0.5% over the past 9 months.

A 0.5% rise might not sound like a lot, but in a historical context, it is. In fact, the economy is usually recession-adjacent after unemployment rises to the degree it has recently: either recovering from a recession, in a recession, or about to enter one.

Historically, the 6m change in unemployment bunches up around -0.3%, and there is a “long right tail”. Basically, like the eat/nap cycle many of us will participate in today, unemployment has tended to swell rapidly for short bursts before spending long stretches recovering.

No harm no fowl?

As the chart above shows, since the second world war, there have been 12 instances of unemployment rising by 0.5% over the prior 6 months. In 10 of those 12 cases, the economy was either in recession or fell into recession within a year.

Looking ahead, professional forecasters surveyed by the Wall Street Journal have unemployment peaking at 4.4% next year—ie, a full 1% above the lows reached earlier this year. The standard deviation around this range of forecasts is 0.5%. It might therefore make sense to look at what’s happened in the past when unemployment rose by, say, 0.5 to 1.5% from the lows.

Since 1948, there have been 132 such instances. In 59 of these cases, the economy was already in recession. In 41 cases where the economy wasn’t already in recession, it entered one within a year. So in only 32 out of 132 cases—less than a quarter—did the economy escape recession after the kind of unemployment increase most forecasters have in the cards. Yet, professional forecasters attach only a 50% chance of recession over the coming year.

Are they winging it?

Macro prognostication is for the birds, and that’s why I prefer to emphasize the empirical record. But, for what it’s worth, the boffins at Goldman Sachs lay out a more optimistic case, based on four arguments:

• “The broader set of labor market data suggests that job growth is likely to remain strong.” Job openings are high, and layoffs and unemployment claims are low.

• “the increase in the unemployment rate since April has come entirely from an increase in the size of the labor force, not a decline in employment.”

• “the weakness in household employment has been concentrated in the most volatile and poorly measured parts of the labor force, such as self-employed workers and young workers.”

• Excessive seasonal adjustments explain some of the recent weakness

Much ado about stuffing?

Sure. But there are as many arguments to the contrary, and I find them more convincing:

• The unemployment number comes from the household survey. We also get a picture of the labor market from the survey of companies. This establishment survey has shown decelerating gains, and has been consistently revised downwards—a reasonably reliable leading indicator for recessions.

• Other labor market indicators are also weakening, like average weekly hours and measures of compensation.

• In the most recent employment report, unemployment rose even while the labor force shrunk. That’s bad.

In any case, most of these arguments are based on coincident indicators, not leading ones. The best leading indicators, like SLOOS, continue to point to a slowdown. I talked about this and other compelling leading indicators in Mortgage Rates are set to Fall.

Say goodbye to your nest egg?

If unemployment does trigger a recession, what might happen to home prices?

Historically, recessions have typically led to falling home prices. There have been 8 recessions since 1948. In all but two of (1974-75 and 1980), year-over-year changes in home prices dipped into negative territory (and in the 1980 recession they came within a whisker).

But maybe unemployment is at such a low level that a 1% rise would not trigger falling home prices? Maybe, but again this would be out of line with history.

At the outset of the 1970 recession, unemployment was 3.9%—the same as today—but prices still fell by more than 10% y/y during that downturn. Same thing in the early 2000s: unemployment was only 4.4% and the recession was mild, but prices still dropped.

All to say: maybe we skirt a recession and home prices rise. But I think the smart money is on higher unemployment, a 2024 recession, and lower home prices. The Fed wanted to slow the economy and soften the labor market, and now the turkeys have come home to roost.

I will have a more fulsome home price forecast out over the coming weeks for paying subscribers.