Previously published on December 2, 2022 in
By Milton Ezrati, Chief Economist at Vested
The debate over the state of the economy has quieted. With the midterm elections done, the side claiming that a recession had already begun has less need to make its case, while the other side has less need to refute it. But even if the politically obsessed have turned away from such matters, economics still matters and so also does the parsing of the arguments used in that mostly political debate. The picture such an effort paints is far from upbeat.
Signs of economic weakness, if not outright recession, are undeniable. The real gross domestic product (GDP) fell in the year’s first two quarters. For many, that’s the definition of recession. Although real GDP rose modestly during the third quarter, neither the paltry 2.6 percent annual growth rate nor the underlying detail did much to contradict the weakness described earlier in the year.
Other evidence of weakness is widespread. New home purchases have fallen by 28.1 percent since the start of the year. Residential construction, as measured by new housing starts, has fallen by 19.5 percent during this same time.
The consumer has held up on balance, but spending has slowed appreciably. In real terms, consumer outlays expanded at only a 1.4 percent annual rate during the third quarter, less than half the more than 3 percent rate averaged during the second half of 2021. The consumer probably would have slowed more were it not that inflation has induced households to accelerate their buying before prices rise again.
Capital spending by businesses has also slowed. In the third quarter, it grew at an annual rate of 3.7 percent in real terms, well below the 7.9 percent growth rate during the year’s first quarter.
Those who talked up the economic situation relied partly on technicalities but mostly pointed to still strong hiring rates. In November, for example, employment grew by 263,000, a strong figure by historical standards. They also noted that the unemployment rate had remained low at 3.7 percent of the workforce. They doubted recession, asking if such high hiring and low unemployment rates could exist in an economic downturn.
Three considerations dull the force of this counterargument. First, the pace of jobs growth has slowed. November’s hiring was only about half the 535,000 monthly hiring rate averaged during the year’s first three months. At this pace of decay, the early months of next year will hardly offer much encouragement. Second, a Nov. 18 Bureau of Labor Statistics report on state-by-state employment shows that unemployment fell in only one state and rose in 24. Rates remain historically low, but the direction of change is ominous.
Perhaps most compelling is the historical record that shows how it takes a while for labor markets to weaken in a declining economy and strengthen in an improving one. Such lags stand to reason. Employers will wait for confirmation of a slowdown before going through a painful and expensive round of layoffs and similarly wait for confirmation of growth before engaging in a round of hiring. This lagging pattern seldom, if ever, wavers in more than 70 years of data on economic cycles. If anything, the lag has become more pronounced in recent cycles.
During the Great Recession of 2008–09, for example, the unemployment rate hit a low of 4.4 percent in March 2007 and stayed low even as the economy approached the recession’s start in January 2008. At first, unemployment rates rose only slowly. It took seven months after the recession began, until August 2008, to get above 6 percent. When the recession ended in June 2009, unemployment had risen to 9.5 percent. Then, even as the economy began its recovery, unemployment continued to climb, reaching almost 10 percent in September 2009. Jobs so lagged the recovery that unemployment remained above 9 percent until September 2011.
A similar pattern is evident in the data on the milder 2001 recession. Unemployment hit a low of 3.9 percent in November 2000 and only crept up to 4.4 percent as the economy weakened and went into recession in May 2001. The rate rose to 5.5 percent as the recession ended in November of that year but continued to rise, reaching 6.3 percent 19 months later in June 2003.
History never repeats itself exactly, but it does argue that the still seemingly strong jobs market is no reason to dismiss other signs of economic weakness. It will take a long while for the statisticians at the National Bureau of Economic Research to say when the United States entered and exited recession this time. In the meantime, the evidence, if not quite beyond cavil, shows that the economy, if not yet in recession, is pointing to one.
