The US risks being caught off-guard by a recession with the labor market far weaker than most realize, strategist says

• Wall Street should still being watching out for a possible recession, said strategist Paul Dietrich.
• He says unemployment is worse than many seem to think at present time.

The US is riding high, but one strategist says economic optimism will eventually be cut short as unseen labor weakness bites.

That's according to Paul Dietrich, who warned that employment conditions are worse than analysts seem to grasp.

"Eventually, the US economy will fall into a recession, catching off-guard the Fed, the US administration, and the majority of economists and analysts," Dietrich wrote.

In his latest monthly commentary, the B. Riley Wealth chief investment strategist cited that September's jobless rate would have been 4.5% if temporary government positions were eliminated.

That's significantly higher than the 4.1% rate published two weeks ago, a figure that convinced Wall Street that the labor market was doing better than originally feared.

Dietrich pointed out this year's significant jump in state and local government employment, adding to the job market's perception of strength.

In his view, the rise of these positions came after $500 billion worth of COVID-era stimulus programs were finally delivered to regional governments this year, which rushed to use these funds on new positions before the September 30th fiscal year-end deadline.

"Unfortunately, almost all of these jobs were listed as temporary jobs, and unless these governments are willing to use their own state and local taxes to keep them hired after September 30th, most of these jobs will be lost over the next few months," Dietrich wrote.

That plays into Dietrich's broader point that rising unemployment can be a sure sign of recession. For instance, temporary help services jobs have been trending down year-over-year for the past 18 months — when this occurs for over three months, the US underwent a downturn, he says.

Though other analysts have also scrutinized the unemployment rate, its importance has been questioned in today's unusual economic cycle. As joblessness has ticked up through September, consumer spending remained an unyielding driver of growth.

But Dietrich isn't so sure the US consumer can remain as healthy for long.

For this, he cited a near-bottom drop in the Consumer Confidence index which fell below consensus expectations in September. Dietrich considers deteriorating confidence as a signal that the consumer sector is shrinking.

He argued that the soft landing narrative fueled by a strong consumer base is temporary, and the consequence of pandemic stimulus programs that encouraged consumers to keep spending.

Given that spending drives 80% of the economy, contracting consumer activity bodes ill for the current US outlook, he said.