Despite the strong jobs report for July, El-Erian warned of a severe recession in the next 12 months.

The renowned economist wrote in the Financial Times that the positive data created an impression among some investors and analysts that the US will avoid a recession.

El-Erian said it was too early to declare the recession watch over, something that the government bond market seemed more interested in.

He said that the July data doesn't rule out the possibility of a short and shallow recession.

There were some warning signs in the jobs report that pointed to the decline in labor participation. Job openings are falling and the number of people applying for unemployment benefits is increasing.

The current strength of the labor market should not be taken for granted according to forward indicators.

He said in the past that the US economy will face "collateral damage" because the central bank was too late to address inflation.

The narrative that corporate earnings will overcome slower sales growth and higher costs dominates the stock market, according to El-Erian. Short-term yields are rising above long-term yields in the market for government bonds.

He wrote that investors are willing to accept lower compensation to allocate their money to a longer maturity investment. The inversion increased to some 40 basis points after the jobs report was released.