Friday’s strong jobs report is a surprise. The unemployment rate is only 3.4%lower than last month, lower than just before the pandemic, and only slightly higher than historical lows in 1955. Jobs increased by 235,000, well above expert forecasts. But fewer people are entering the labor force even though higher wages and the historic ease of finding work should have added people to the labor force. The employment-to-population ratio is lower than it was before the pandemic, largely as a result of population ageing. Older people are retiring or being pushed out.
But lower worker confidence and slowing wage growth point to a weaker labor market under this strong headline number and perhaps still signal an impending recession.
Worker confidence has dropped
On Tuesday, May 2, JOG numbers showed that job vacancies were down and quit rates (indicating worker confidence) were down significantly from last year. The drop in churn rates was especially strong in construction, accommodation and food services, and leisure and hospitality, where wage increases and demand had accelerated. People are returning to restaurants and hotels, but workers aren’t confident enough to find a better job if they quit: 165,000 fewer workers quit leisure and hospitality jobs in March 2023 than in March 2022
Overall, from March 2022 to March 2023, quitters fell from 2.9% of the workforce, or 4.5 million workers, to 3.9 million workers, or 2.5% of the workforce. who quit their jobs in a month.
In today’s report, a similar number, the ratio of “people quitting work” or quitting to the total jobless continued to fall from today. 13.3% compared to the March rate of 14.2% and well below the peak of 15.3% in January 2022.
Inflation-adjusted wages are falling
Real wage growth is negative 0.6%, indicating that firms can raise prices faster than wages rise. average weekly earnings for all private sector workers it was $1,141.39 per week, more than $36 more than a year ago, but to keep up with inflation, workers needed about $80 more. Leisure and hospitality workers are the lowest paid in our society, with a median weekly earnings of $530.29 in April. Their salaries had to exceed $547 to keep up with inflation above 7%.
Is a recession coming or is it already here?
Do you remember when you were first told that the starlight was seeing your past? our nearest star next to centaur it’s 4,243 light-years from Earth, which means we’re looking at what it looked like 6 billion times 4,243 years ago. That the star you think you’re looking at no longer exists? That kind of the same thing with the unemployment rate.
The unemployment rate is a lagging indicator, so when you look at a low unemployment rate, you’re really looking at a situation that represents the supply and demand of workers several months ago. I was always surprised to see that the National Bureau of Economic Research had announced the end of the Great Recession and May 2009, but the unemployment rate kept going up and up until October 2009 when it reached a paltry 10% months later.
In 2009, the economy was already recovering when the unemployment rate peaked. So the opposite is true. Falling unemployment rates meant the economy slowed down probably before the December holidays. Why is the unemployment rate a lagging indicator?
Companies don’t immediately lay off workers when sales are a little slow or credit is tighter. It takes care, attention, and months to put together a layoff plan. The same is true when the economy improves. Employers are slow to hire new workers until they are sure they can sell more goods and services and the economy is rebounding strongly. 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 the unemployment rate as a proxy for future inflation. Other the leading indicators of inflation are better predictors.
inverted yield curve
One of those indicators that economic actors predict a recession is the relationship between the price of short-term debt and long-term debt. Investors and lenders generally demand a higher interest rate the further in the future the debt is paid off. More demand, more growth, more uncertainty is expected in the long term, rather than the short term. But when growth and employment expectations are negative and the short term is risky, investors will need more short-term returns than long-term returns. When that happens, long-term rates are LOWER than short-term rates and the yield curve (even adjusted for inflation) is negative. I calculated the actual inverted yield curve, and it looks horrible.
I calculated the spread between the 10-year constant-maturity Treasury and the inflation-adjusted 2-year constant-maturity Treasury 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 hope a recent poll shows a shift in the opinion of the majority expecting a recession.
Concerns about the debt ceiling
Former CEA President Laura Tyson and myself warned in November that the most worrying issue if the Republicans won the House would be the games they would play with the debt ceiling. House Republicans could trigger a deep recession if they don’t raise the debt ceiling to pay spending. As Noah Smith reports Before 2011, Congress always raised the debt ceiling whenever necessary, so that the interest on the Treasury bills was secured.
But in 2011, another Republican-controlled Congress refused to raise the ceiling until they get spending cuts (they never seek to raise taxes to reduce debt). Many have pointed out that Republicans may refuse to approve public spending at the end of the year. and shut down the government. But refusing to raise the debt limit belies the highly advantageous position of US Treasuries as the world’s safest investment.
Debt default would certainly trigger a global recession, that worries me.