Alarm bells were ringing about a potential US recession, but then this week’s jobs report landed
US recession worries arent dead. But they may have passed into a coma at 8:30 am ET on Friday. Thats when the Labor Department released its latest jobs report, which indicated employers are hiring virtually all the workers they can find 339,000 in May alone. The report brought a sigh of relief from many economists. There have been a number of recession alarm bells ringing in recent weeks. For instance, major retailers such as Target, Macys and Costco released weaker-than-hoped-for earnings and sales guidance. Tens of thousands of workers mostly in tech and media companies were laid off. And the economy saw a string of the biggest bank failures since the 2008-09 financial crisis, which had everyone from Federal Reserve staff economists to major banking CEOs talking about rising recession risks. But for every recession alarm bell, the continued strength in the labor market seems to be an answer to those worries. Recessions arent just about jobs. But the strength of the labor market, and what it means for consumer spending, is central to whether the US economy is growing or shrinking. Consumer spending is responsible for more than 75% of US economic activity. If US consumers have jobs and paychecks coming in, theyre likely to keep the economic engine purring along. You can throw the near-term recession calls out the window with this jobs numberthe American consumer is employed and spending, said Jamie Cox, managing partner for Harris Financial Group, in a note Friday morning. Recessions often can be brought about when consumers pull back on spending because theyre worried about losing their jobs. But despite some high profile job cut announcements in certain sectors, for the most part, workers right now dont have to worry about that. Businesses recognize their number one problem is finding and retaining workers, said Mark Zandi, chief economist for Moodys Analytics. They do not want to lay off workers. He points out that the latest jobless claims data shows about 230,000 workers filing for initial benefits after losing their jobs. In a typical economy, that would be about 250,000 a week, he said. In a recession it would be north of 300,000. Even some economists who believe that the economy could soon start to shrink think it might do so while avoiding the job losses that are a central part of just about every recession. I think even in a recession environment, were going to have a relatively strong job market. Ive been calling it a jobful recession, and I dont think weve had that since World War II, said Dave Gilbertson, labor economist at UKG, an HR, payroll and workforce management provider. I think thats part of why the economists have really struggled to get this right. Among those thinking, or at least hoping, that the strong jobs market can keep the US economy out of recession is Federal Reserve Chair Jerome Powell. Weve raised rates by 5 percentage points in 14 months, and the unemployment rate is 3.5%, pretty much where it was or even lower than it was when we started, Powell said a month ago at a news conference following the Feds latest rate hike. Its still possible that the case of avoiding a recession is, in my view, more likely than that of having a recession. The case of having a recession, I dont rule that out either: Its possible that we will have what I hope would be a mild recession. Whats clear is that consumers are continuing to spend money. Maybe theyre not spending as much money at Target or Costco as those stores would like, but its partly because theyre spending it elsewhere. After years of being stuck at home during the pandemic, many Americans are jamming into very full planes, paying significantly higher airfares, in order to make trips again. Other experiences, from concerts to sporting events to movies, are seeing a surge in spending driven by pent-up demand. Once you have this strength in spending and job growth, it can unleash a virtuous cycle that is hard to slow down, said Julia Pollock, chief economist at jobs search service ZipRecruiter. Thats not to say that the jobs market hasnt slowed down. The pace of hiring so far this year, an average of 314,000 jobs added each month according to the Labor Departments survey of employers, is down nearly a third from the pace of job growth during the same five months in 2022. But by historical standards, its very strong. For the 10 years from 2010, after the Great Recession ended, and 2019, just ahead of the upheaval caused by the pandemic, employers added an average of 183,000 jobs a month, or less than two-thirds of the current rate of growth. Powell said hes not particularly worried about the cooling of the labor market over the last year. In fact thats one of things the Fed has been looking for as it attempts to bring down the rate of inflation. Its possible that we can continue to have a cooling in the labor market without having the big increases in unemployment that have gone with many prior episodes, he said at the press conference after the last rate hike, although he cautioned, that would be against history. I fully appreciate that would be against the pattern. The slowdown in hiring the number of job openings in a separate Labor Department reading is down 14% from a year ago isnt the only sign of some weakness just below strong headline numbers. Unemployment jumped 0.3 percentage points in the May reading, the biggest one-month increase in seven years, excluding the wild swings that took place during the pandemic-affected readings of 2020 and 2021. The unemployment rate is based on a different survey than the survey of employers used to calculate the jobs numbers. Some economists have suggested that a half-percentage point rise will often be a warning sign of a recession ahead. But the overall unemployment rate of 3.7% still indicates a very tight labor market full employment by some measures. And despite some sectors and regions showing weakness in their corner, the overall labor market is still very strong, said ZipRecruiters Pollock. Fridays jobs number suggests most of the economy is still piping hot, she said. We could be having an information and manufacturing recession. But for the whole country, the numbers say were nowhere near a recession.