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Labor Market Points Towards Recession Despite Consensus Shifting To Soft Landing

By: Peter Gibson, Chief Investment Officer

The US economy’s post-COVID recovery has enjoyed a considerable run, outpacing developed countries worldwide on the back of resurgent consumer spending.  As Americans spent down their excess stimulus savings and the Fed tightened financial conditions via a historically fast rate hike campaign, concerns mounted regarding the economy’s ability to slow down without initiating a full-blown recession.  In recent months, economists have begun to back away from these recession calls and embrace a “Goldilocks” forecast where the economy contracts neither too fast or too slow.  However, labor market indicators are now moving in the opposite direction.  In fact, the national jobs picture is indicating that the recession risk which has hung over the economy this past year is as present as ever.

Employers have not yet reacted to the current economic slowdown by laying off large numbers of workers, but monthly gains in nonfarm payrolls have slowed meaningfully in recent months, dropping the year-over-year rate of payroll growth below 2% for the first time since the depths of the pandemic in March, 2021.  This slower pace of hiring is contributing to an increase in the unemployment rate, as we highlighted in our previous discussion of Sahm’s rule.  However, an additional measure highlights how widespread (and rare) the recent increases in the unemployment rate are.

Aggregating state-level unemployment statistics shows that 38 states are currently seeing increases in their individual unemployment rates.  Since the era of modern monetary policy management began in 1980, the US has never experienced this widespread of an unemployment rate increase without concurrently being in a recession.  We’ve had close calls coming out of the early-1990’s recession and in summer, 2022 when 36 and 34 states, respectively, were simultaneously experiencing higher unemployment.  But the current situation is unparalleled, and especially of note when consensus economist surveys are backing away from recession calls that have been on the books for the majority of the year.

The challenges that accompany economic forecasting can make it difficult for those in the business community to make plans given the uncertain outlook.  However, it appears prudent to plan for the worst (and hope for the best!) given the historical nature of these labor market readings.

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