Does the latest Jobs Report signal we’re going into a recession? No, it doesn’t. Let’s review some facts:
- The latest Jobs Report showed the unemployment rate rose to 4.3% (Exhibit 1).
- The reason for the higher unemployment rate is two-fold. On net, we added 114K more payroll jobs (Exhibit 2), but that’s not enough to absorb all the new entrants into the labor force. We had an increase in prime-age labor force participation to 84.0%, up from 83.7% in June and near an all-time high since 1948 (Exhibit 3).
- Sectors that added or maintained jobs this past month include “early-warning” sectors: construction and durable goods manufacturing (Exhibit 4).
- Construction and durable goods manufacturing are the sectors that tend to shed jobs if we’re heading into a recession or a deep economic slowdown, because why build things if the demand for these things isn’t going to be there in the near future?
- The sector that lost the most jobs is information, which is where tech companies sit. There’s a lot of innovation happening right now in information services (e.g., AI), so it’s not surprising that this sector is experiencing some changes.
- The latest Jobs Report triggered the “Sahm Rule”, but this is likely just a false alarm (Exhibit 5).
- What is the Sahm Rule? The Sahm Rule is a “statistical regularity” that says when the three-month moving average of the national unemployment rate rises by 0.50 percentage points or more relative to the minimum of the three-month averages from the previous 12 months, we are in a recession.
- It’s not an indicator that we’re heading into a recession. It’s an indicator that we’re currently in a recession.
- Even Claudia Sahm, the former Fed Reserve economist who created this rule, doesn’t think we’re currently in a recession.
- Why do we likely have a false alarm this time? In the bounce-back from the pandemic, the unemployment rate was artificially low – the lowest unemployment rate we’ve seen since the late 1960s (see here).
- Part of the increase we’ve seen in the unemployment rate is just the labor market coming back into better balance. If you think of the equilibrium unemployment rate as being around 4.0-4.1%, we’re not too far above the equilibrium rate.
- Other “rules” like the inverted yield curve have also sounded false alarms this time on whether we’re currently in or heading towards a recession.
This Jobs Report is more consistent with an economy that has reached an employment ceiling given tight monetary policy. I wouldn’t worry that this Jobs Report signals the Fed is behind the curve or that we’re heading into a recession.
But the Fed should cut its benchmark rate when it meets in September. We’re at the point where inflation is down and looks to be headed toward the Fed’s 2% target. And the labor market has cooled enough so that it’s no longer a source of inflationary pressure.
Would it have made a difference if the Fed had already cut interest rates in its July meeting? No. The Fed signaled that cuts are on the table in September, and that signaling was enough for longer term interest rates like mortgage rates to start falling and for financial conditions to loosen. I talk more about this in this interview (scroll to the 23-minute mark).
American Consumer 