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Stellar Jobs Report Bucks Recession Fears
August 07, 2022
The timing of the July jobs report was impeccable. The debate of whether or not the US is in a recession had been growing with many doubting that the two quarters of GDP contraction were enough to make that claim. The main reason was the persistent strength in the labor market which has remained tight during the post-pandemic recovery. In particular, job openings had reached an all time high and many business PMIs pointed to an increase in labor demand. The July jobs report showed that this is likely still the case.
The addition of 528,000 jobs in July was the second highest this year after February’s large 714,000 increase. On top of that, the unemployment rate declined another -0.1 ppt to 3.5%. This surprised expectations which were expecting another moderate gain as had happened in the past three months. It also backed up the FOMC’s statements that they still saw a strong labor market including Chair Powell’s insistence that “the continued strength of the labor market suggests that underlying aggregate demand remains solid” in the opening statement of his press conference.
Another point of strength can be seen in the sizeable -269,000 decrease in the number of long-term unemployed, the largest since March and larger than the average of the three months in Q2 2022. Long-term unemployment now only accounts for 18.9% of all unemployment., just below the 2019 low of 19.1% set in July 2019. This combats the notion that the pandemic has caused long-term scarring in the labor market and supports the thought that consumer strength can ease the pain of a contraction in business activity.
What does this mean for the recession debate?
To be deemed a recession officially, the National Bureau of Economic Research (NBER) must consider a wide array of economic data and make an official announcement. The labor market is, of course, a significant part of that which is why job gains have been in focus over the last few months. If the NBER is paying attention (which is most definitely is), it will likely count employment data against the argument for the economy being in a recession.
For context, we can look at what job gains have been like in months that were labelled a recession by the NBER. Using data from Q1 1947 on, months where the economy was in a recession saw job losses of -365,000 on average while months out of recession saw job gains of 198,000 on average. The trend is similar in a more recent sample of 1997 to 2019 with job losses averaging -345,000 during a recession and job gains averaging 156,000 out of a recession.
It’s very clear that July’s employment increase is not consistent with historical months in recession. However, that doesn’t mean one is not on the way. When looking at months before a recession, one will find that there is no clear distinction in job gains. Since Q1 1947, normal months before a recession averaged job gains of 104,000 while other normal months out of a recession had average job gains of 202,000. The proportion is similar when shrinking the sample to 1997 to 2019.
Many also refer to a “technical recession” which is indicated by two consecutive quarters of negative GDP. After the Q1 and Q2 2022 GDP numbers came out negative, there was much allusion to this strict definition. By this standard, the July jobs report looks nothing like a recession.
The chart above shows the relation between a month’s job gains and the GDP growth of the quarter that the month was in. Recessionary months in red show that both negative GDP growth and recession are associated with either very little job gains or job losses. Not a single month in recession saw an increase in employment by 500,000 or more. In fact, that would be more consistent with a strong expansion of about 5% according to the trend line.
If we were to take the current estimate of Q3 2022 GDP growth at 1.3% from the GDPNow forecast, the July point would probably drop somewhere around the yellow rectangle on the chart. Not only are there no months that are labelled “in a recession” in that area, but the points there look to be outliers from the trend in which a strong labor market was paired with slow to no growth or contraction.
While some may think this is just a matter of semantics, the dynamics of a tight labor market are very significant to policymakers trying to navigate elevated inflation. The strong July jobs report provides a lifeline for those policymakers who are trying to avoid causing unnecessary pain to households while deflating economic activity to a level with healthier price levels.