Jobs Strength Won't Last - Vested
Previously published on December 29, 2022 in
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By Milton Ezrati, Chief Economist at Vested

For a while, a strong jobs picture has defied other evidence of a softening economy, perhaps even a recessionary one. Before the election, when the White House needed desperately deflect claims of recession, it pointed on occasion to technicalities but mostly to low rates of unemployment and historically high rates of hiring. Now that the election is over, it might be easier for all to face reality. Economic signals say weakening and, if not recession, that the economy is moving in that direction. Meanwhile, news from the labor market offers a weak contrary signal at most.

Outside the jobs picture, signs of economic weakness, of not outright recession are undeniable. The real gross domestic product (GDP) fell in the first two quarters of the year. For many that is the definition of recession. Though real GDP rose modestly during the third quarter, neither the 3.2% annual growth rate nor the pattern in the detail did much to contradict the weakness described earlier in the year.

Otherwise, evidence of weakness is widespread. New home purchases have fallen some 23% since the start of the year. Residential construction, as measured by new housing starts, has fallen some 27% during this same time. The consumer has held up on balance but has slowed spending appreciably. In real terms such spending expanded at barely over a 1.0% annual rate during the last two months, less than half the over 3.0% rate averaged during the second half of 2021. The consumer probably would have slowed more were it not that inflation has induced households to buy before prices rise again. Capital spending by business has also slowed. In the second and third quarters, it expanded at only a 3.2% annual rate in real terms, well below the 7.9 rate of growth during the year’s first quarter.

To be sure the labor market seems to paint a different picture. In November, for instance, employment grew by 263,000, a strong figure by historic standards. Unemployment remained low at 3.7% of the workforce. If such news can raise doubts about other signs of weakness, three considerations dull the force of any such 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 first three months of the year. At this pace of decay, early months next year will hardly offer much encouragement. Second is a recent Bureau of Labor Statistics report on state-by-state employment. It showed 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 historic record that shows how it takes a while for the labor market to weaken in a declining economy (and strengthen in an improving one.) Such delays 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 over 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 instance, the unemployment rate hit a low of 4.4% in March of 2007 and stayed low even as the economy approached the recession’s start in January of 2008. At first, it rose slowly. It took seven months after the recession began, until August 2008, to get above 6.0%. When the recession ended in June 2009, unemployment had risen to 9.5%. Then, even as the economy began its recovery, unemployment continued to climb, reaching almost 10% in September of 2009. Jobs so lagged the recovery that unemployment remained above 9.0% until September 2011.

A similar pattern is evident in the data on the milder recession of 2001. Unemployment hit a low of 3.9% in November 2000 and only crept up to 4.4% as the economy weakened and went into recession in May 2001. The rate rose to 5.5% as the recession ended in November of that year but continued to rise, reaching 6.3% 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 fine 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, says that the economy, if not yet in recession, is pointing to one.

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