(Yahoo!Finance) - When we were younger, there was a point when someone told us that a recession was defined as two consecutive quarters of negative GDP growth, as measured by the Bureau of Economic Analysis (BEA).
Later, some of us learned that a recession is in fact designated and dated by the National Bureau of Economic Research (NBER), who make the call when they see a “significant decline in economic activity that is spread across the economy and that lasts more than a few months.” The variables the bureau emphasizes include income, employment, personal consumption, and industrial production.1
If there’s any doubt that it’s the NBER who’s behind official recession calls, then consider this statement from the BEA:
While gross domestic product (GDP) is the broadest measure of economic activity, the often-cited identification of a recession with two consecutive quarters of negative GDP growth is not an official designation. The designation of a recession is the province of a committee of experts at the National Bureau of Economic Research (NBER), a private non-profit research organization that focuses on understanding the U.S. economy.
So there you have it.
That said, this exercise of defining recessions isn’t very productive. It’s mostly just semantics, and it’s highly dependent on the metrics you decide to include and exclude in how you calculate economic activity.²
One thing everyone can agree on is that much of the economy is slowing. In fact, the BEA says GDP contracted at a 1.6% rate in Q1, and the Atlanta Fed’s GDPNow model is pointing to a 1.2% contraction in Q2.
But some very visible aspects of the economy are holding up very well.
Jobs growth? In this economy?
While there have been signs the jobs market has been cooling, it certainly does not reflect an economic recession.
According to Bureau of Labor Statistics (BLS) data released Friday, U.S. employers in June added a healthy 372,000, which was considerably stronger than the 265,000 expected by economists.
Total employment stood at 151.980 million, which is up 21.467 million from its low in April 2020. It’s now just barely below its pre-pandemic level of 152.504 million in February 2020.
So while the stock market has tumbled and economic activity has decelerated since the beginning of the year, the labor market has added 2.74 million jobs during the same period with gains in every month.
Also, the unemployment rate remains very low at 3.6%.
This is in line with BLS data released on Wednesday that showed the layoff rate remained near a record low of 0.9% in May.
The more timely unemployment claims data also suggests the jobs market is in pretty good shape.
Initial claims for unemployment insurance came in at 235,000 for the week ending July 2. While the number is up from its six-decade low of 166,000 in March, it remains near levels seen during periods of economic expansion.
“If the economy is in a recession, employers have not seemed to notice,“ Wells Fargo economists wrote on Friday.
So far, we’ve been looking at labor market metrics that reflect the past and the present. But what about the future?
Based on job openings data, it’s pretty clear that the demand for more labor continues to be very strong.
According to BLS data released Wednesday, there was a whopping 11.25 million job openings in May. That compares to the 5.95 million unemployed during the same period.
With nearly two job openings per unemployed person, this is a very tight labor market with a lot of demand for workers.
Why this is not a recession
“In recent decades, the two measures we have put the most weight on are real personal income less transfers and nonfarm payroll employment,” the NBER explained regarding its recession calls.
Indeed, according to Deutsche Bank’s analysis of recessions since 1939, the first month of a recession on average sees a decline in jobs. And we haven’t seen a decline in jobs since December 2020.
Regarding real personal income less transfers, that metric also continues be very strong. According to BEA data released June 30, it climbed to a record annualized rate of $14.5 trillion in May.
The BLS also has a metric called the index of aggregate weekly payrolls, which is the product of jobs, wages, and hours worked. It’s a rough proxy for the total nominal spending capacity of the workforce. This metric increased by 0.6% month-over-month in June to a record high of 172.4, reflecting a 9.4% jump from a year ago. Before the pandemic, the annual growth rate was trending at around 5%.
When incomes are rising, so is the capacity to spend. And consumers are spending.
Strong jobs data is good. However…
These labor market trends are obviously good news for those getting new jobs as well as those who aren’t getting laid off.
However, there is the risk that this good news and the incremental consumer demand that comes with it puts pressure on the supply chain, which would be inflationary. And that’s bad news as the Federal Reserve’s top priority right now is to bring down inflation, even if it means employing tight monetary policy that does some serious damage to economic activity.
On an encouraging note regarding inflationary pressures, average hourly earnings in June increased by just 0.3% from May. This reflects a 5.1% gain from a year ago, which is down from 5.3% in May, 5.4% in April, and 5.6% in March.³
While the level of job openings remains very high, it has been declining from its March high of 11.9 million. This should further help ease wage pressures, and in turn inflation should come down.
That said, we seem to be a long way from getting “clear and convincing” evidence sought by the Fed that inflation is on its way lower. And until we get that evidence, expect the Fed to continue to tap the brakes on the economy.
For now, the strong labor market is keeping the economy from tipping into a recession. But the longer the Fed has to tighten monetary policy aggressively, the more likely it becomes that people start to lose jobs as part of the economic pain required to rein in prices.
