Jobs Report Shows Low Unemployment But Also Signals A Possible Recession

Friday’s strong jobs report was a surprise. The unemployment rate is only 3.4% —lower than last month, lower than just before the pandemic, and just a bit higher than the historic lows in 1955. Jobs are up 235,000, well above expert forecasts. But fewer people are entering the labor force even though higher wages and historical ease in finding work should have added people to the workforce. Employment to population ratios are smaller than before the pandemic, largely a consequence of population aging. Older people are retiring or getting pushed out.

But lower worker confidence and slowing wage growth flag a softer labor market under this strong headline number and perhaps still signal a coming recession.

Worker Confidence Is Down

On Tuesday, May 2, JOLTS numbers showed job openings down and quit rates (which signal worker confidence) falling significantly from last year. The fall in quit rates was especially strong in construction, accommodation and food services, and leisure and hospitality, where wage increases and demand had been steaming. People are flooding back to restaurants and hotels, but workers aren’t feeling so self-assured they can find a better job if they quit — 165,000 fewer workers quit in leisure and hospitality jobs in March 2023 than they did in March 2022.

Overall, from March 2022 to March 2023, quits fell from 2.9% of the workforce or 4.5 million workers, to 2.5% of the workforce or 3.9 million workers, who left their jobs in a month.

In Friday’s report a similar number, the “job leavers” or quitters’ share of total unemployed continued to fall from Friday’s 13.3% compared to March’s rate of 14.2% and way down from a high of 15.3% in January 2022.

Wages Adjusted For Inflation Are Falling

Real wage growth is negative 0.6%, which signals that firms can raise prices faster than they are raising wages. Average weekly earnings for all private sector workers were $1,147.58 per week, up $42 from a year ago, but to keep up with inflation workers needed about $13 more. Workers in leisure and hospitality are the least paid in our society, with average weekly earnings of $533.65 in April. Their wages needed to be more than $560 to keep up with 5% inflation.

Is A Recession Coming Or Is It Already Here?

Do you remember when you were first told that the light from the star was seeing its past? Our nearest star Proxima Centauri is 4.243 light years away from Earth, meaning we are seeing what it looked like 6 trillion times 4.243 years ago. That the star you think you’re looking at might not even exist anymore? That’s sort of the same with the unemployment rate.

The unemployment rate is a lagging indicator so when you look at a low one, you are really seeing a situation representing the supply and demand of workers several months ago. It was always shocking to me to see that the National Bureau of Economic Research had called the end of the Great Recession in May 2009 but the unemployment rate still kept on going up and up and up for until October 2009 when it reached a miserable 10% months later.

Back in 2009 the economy was already in recovery when the unemployment rate peaked. So, the reverse is true. Falling unemployment rates meant the economy was in slowdown probably before the December holidays. Why is the unemployment rate a lagging indicator?

Firms don’t immediately lay people off workers when sales are a little slow or credit gets tighter. It takes care, attention, and months to put together a layoff plan. The same thing is true when the economy gets better. Employers are slow to hire new workers until they are confident they can sell more goods and services and the upturn in the economy is solid. That is why the unemployment rate we see now reflects decisions and expectations about the economy months ago.

Because the unemployment rate has little to do with inflation, the Federal Reserve does not use it as an indicator of future inflation. Other leading indicators of inflation are better predictors.

Inverted Yield Curve

One such indicator that economic actors predict a recession is the relationship between the price of short- and long-term borrowing. Investors and lenders usually demand a higher rate of interest the farther in the future the debt is paid back. Higher demand, more growth and more uncertainty is expected over the long term, rather than short. But when expectations about growth and employment are negative and the short term is risky, then investors would need more returns in the short term than long. When that happens is long-term rates are LOWER than short-term and the yield curve (even adjusted for inflation) is negative. I calculated the real inverted yield curve, and it looks awful.

I calculated the spread between 10-Year Treasury Constant Maturity and 2-Year Treasury Constant Maturity bonds adjusted for inflation and it is negative. The yield curve points to a recession.

Almost two weeks ago 47% of economists working for corporations expected a recession by the end of the year, 53% did not. I expect a recent poll would show a flip in majority opinion expecting a recession.

Debt Ceiling Worries

Former CEA Chair Laura Tyson and I warned back in November that the most worrisome problem if the Republicans won the House would be the games they would play with the debt ceiling. A deep recession could be triggered by House Republicans not raising the debt ceiling to pay for spending. As Noah Smith reports, before 2011, Congress would always just raise the debt ceiling whenever it was necessary, so interest on the Treasury bills would be assured.

But in 2011, another Republican-controlled Congress refused to raise the ceiling until they got government spending cuts (they never seek to raise taxes to cut the debt). Many have pointed out that Republicans can refuse to approve government spending at the end of the year and shut the government down. But refusing to raise the debt limit gives lie to the highly advantageous position of the U.S. Treasury bond being the safest investment in the world.

Defaulting on the debt would certainly trigger a global recession. That worries me.