The Case for Employment Growth and Salaries: Gad Levanon’s Commentary on the First Three Months of a Strong Economic Recovery
The chief economist at the Burning Glass Institute is Gad Levanon. He was the head of the Labor Market Institute at The Conference Board. The opinions expressed in this commentary are his own.
Employment growth remains strong, why? First, the US economy is holding on better than many expected. The Atlanta Fed predicts that the economy will grow at a slower pace in the third quarter than it did last year, but is still considered not to be in a recession. The demand for workers that make goods and services increases when demand is strong.
Officials at the Federal Reserve have been keeping a close eye on hiring and wages as they proceed with a series of rate increases meant to combat inflation. The job data indicates that, for now, they are doing so without tipping the economy into a recession that would throw millions out of work.
The layoffs have been historically low despite the slowing of the economy. Initial claims for unemployment insurance, an indicator highly correlated with layoffs, were 219,000 for the week ended October 1 – higher than the week prior, but still one of the lowest readings in recent decades. After years of increasingly traumatic labor shortages, many employers are reluctant to significantly reduce the number of workers even as their businesses are slowing. Companies worry that when they start expanding again they will not be able to recruit new workers.
There are industries that are still growing as they catch up with demand, while others are experiencing high growth as they adjust to higher demand. Demand for services such as data processing and hosting is higher than before the outbreak of the swine flu. Structural changes to buying patterns will keep demand high.
The year will look very different next year. Many industries have reached employment levels that were pre-pandemic. With demand saturated, those industries may revert to slower hiring. But this alone is unlikely to push job growth into negative territory. What will do that is monetary policy.
There are two ways to rein in the labor market: Either reduce demand for workers or increase the labor supply. It isn’t easy to increase labor supply. It requires legislative action to increase immigration, drive people into the labor force, or grow investment in workforce training. This is going to prove hard in today’s political environment.
Job growth eased slightly in September but remained robust, indicating that the economy was maintaining momentum despite higher interest rates. The strong showing left many investors unhappy, and they saw signs that the fight against inflation would become more complex.
Carl Tannenbaum, chief economist at Northern Trust said that if he woke up from a nap, he would know that the job market was still strong.
Last week, Goldman Sachs said it still believes the US economy will avoid a recession and instead move towards a “soft landing” where inflation moderates but growth continues.
“We still see a very plausible non-recessionary four-step path from the high-inflation economy of the present to a low-inflation economy of the future,” Goldman Sachs chief economist Jan Hatzius wrote in a report.
By contrast, a Bloomberg Economics model released in late October determined the risk of a recession over the next 12 months stands at a staggering 100%. A model run by Ned Davis Research has a 98.1% likelihood of a global recession.
But Goldman Sachs pointed out the transition to more sustainable — but still positive — economic growth “has already occurred, and it looks durable.” The bank expects gross domestic product growth of about 1% over the next year.
Goldman agrees that the price side has been less advanced. Inflation metrics have mostly stopped getting worse but they also haven’t really got any better either.
The United Kingdom is the only G7 economy to have contracted in the third quarter and is now 0.4% smaller than it was at the end of 2019, before the coronavirus pandemic began, according to the ONS.
Manufacturing led the quarter’s fall and it was widespread across most industries. Services were flat overall, but consumer-facing industries fared badly, with a notable fall in retail,” ONS director of economic statistics Darren Morgan said in a statement.
The extra bank holiday for Queen Elizabeth II’s funeral on September 19 also played a role, as some businesses closed or adjusted their operations that day, the ONS said. GDP fell by 0.6% in September.
“Lower consumer spending appetite is likely to help push GDP into a second-straight contraction during the fourth quarter,” James Smith, developed markets economist at ING, said in a note on Friday.
The Bank of England warned last week that the UK economy could experience its longest recession since the 1940s. The contraction in the third quarter was less than in France and Germany and less than in Italy.
The Commission expects the GDP growth of the euro area to stay positive in the next two years. The Bank of England predicted last week that there would be a recession in the UK over the next two years.
The contraction of economic activity is set to continue in the first quarter of 2023, as inflation keeps cutting into households’ disposable incomes, according to the Commission.
Mark Zandi, chief economist for Moody’s Analytics, stated in a report on Tuesday that the economy is set to have a hard time in the next decade. “But inflation is quickly moderating, and the economy’s fundamentals are sound. The economy should avoid a downturn with a bit of luck and some good policy from the Fed.
It’s a strange question. How could we not know if we’re in a recession? It feels a little bit like asking if I’m sad. If you’re sad, shouldn’t you feel it?
The UK’s weak economic growth is putting more pressure on the government as they try to restore credibility after the collapse of the bond market and a former Prime Minister slashing taxes.
The Finance Minister Jeremy Hunt reversed most of her plans in his first few days on the job, and is expected to announce hefty tax rises and spending cuts next week in a bid to reduce debt.
Hunt said that there was no illusion that there was a tough road ahead and that decisions needed to restore confidence and economic stability. But to achieve long-term, sustainable growth, we need to grip inflation, balance the books and get debt falling. There is nothing else to do.
Fed Rate Increases, Consumer Prices and the State of the Economy: What Happens When the Economy Gets Closer to a Recession?
The Federal Reserve will likely raise interest rates on Wednesday. The last four hikes increased the investors’ optimism that it will be a smaller increase.
The traders are expecting a half-point increase. Federal funds futures show a half-point hike.
The hope is that inflation pressures are finally starting to abate enough that the Fed can pivot — Fed-speak for a series of smaller rate hikes -— to avoid crashing the economy into a recession.
It might not be that simple. The producer price index rose 7.4% over the past year, according to the government. The rate was higher than expected but still less than the 8% increase that occured in October.
The more widely watched Consumer Price Index data for November comes out Tuesday, just a day before the Fed announcement. The consumer prices index rose year-over-year through October.
“Inflation has probably peaked but it may not come down as quickly as people want it to,” said Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research.
The other problem: The Fed’s rate hikes this year have had limited impact on the economy so far. The job market remains strong despite the fact that mortgage rates have spiked and that demand for housing is not as strong. Consumers are still spending while wages are growing. That can’t last indefinitely.
The Fed meeting, the EU industrial production, UK inflation and earnings from Trip.com will be on Wednesday.
A pivot or pause isn’t a cure-all for the market, according to the co-chief investment officer at Truist Advisory Services. “Rate cuts may be too late. Recession risks are still relatively high.”
The economy of the US isn’t in a recession yet. Are American shoppers being tapped out? We will get a better idea of that on Thursday when the government releases retail sales for November.
So it’s possible consumers were simply getting a head start on holiday shopping. Retail sales are impacted by inflation since people have to spend more money for stuff.
Everyone is talking about inflation this year. According to Cosserat, it will be more about disinflation in the years to come.
What Do Consumers Think about the Future? A Comment on Cosserat’s Theoretical Insights into the Nature of a Recession
What does that say about investors? Cosserat said people should be looking for quality consumer companies that still have pricing power and can maintain their profit margins. Two stocks that his firm owns that he said fit that bill: Luxury goods maker Hermes
(HESAF) and cosmetics giant L’Oreal
Earnings from Accenture, DRI and WGO will be made on Friday.
It’s possible that all this talking about a recession can cause one. How people feel is a huge driver of consumer behavior and business planning. The famous British economist John Maynard Keynes coined the phrase “animal spirits” to describe what drives investors, consumers and business leaders. Fear,hope, uncertainty, and confidence are very important to how the economy fares.
“You get into this kind of self-reinforcing negative cycle,” he told CNN’s Early Start. “So when sentiment is this bad and starting to feed on itself, we run the risk of talking ourselves into one.”
“Look, we’re planning as if there’s going to be a mild recession next year,” United Airlines CEO Scott Kirby told CNN This Morning. “And a lot of people in the business world are trying to talk ourselves into one is what it sometimes feels like to me.”
But he added, “If I didn’t watch business shows or read the Wall Street Journal, the word recession wouldn’t be in my vocabulary because we just don’t see it in our data.”
“There may not be that much difference between a soft landing and a mild recession,” he says. He says we should watch out for the danger of a major recession.
In the months since Jamie Dimon expressed concern about an impending recession due to higher interest rates and consumers spending down their excess savings, consumer spending has gone down.
“When you’re looking out forward, those things may very well derail the economy and cause this milder or hard recession that people are worried about,” he said earlier this month.
With inflation still at the highest level in a generation and central banks around the world continuing to raise interest rates, the risks for 2023 are undoubtedly high.
It was a brutal period for the stock market, with roughly one-fifth of the value of the S&P 500 vanishing and the Nasdaq dropping by more than one-third. All three major US markets suffered their worst years — by far — since 2008.
The First Month of a Slow Economic Recession: How the U.S. Economy Has Receded and What It Means to Be
New numbers published last week show first-time applications for unemployment benefits edged up to 225,000. That is exactly where it was a year ago, and is still historically low to this day.
After spiking above $5 a gallon for the first time ever in June, gas prices have plunged. The national average for regular gasoline recently dropped to $3.10 a gallon, an 18-month low, though it has crept higher in recent days to about $3.22 a gallon.
It has begun to reverse when measured on a monthly basis. Real wages have been growing faster than consumer prices, a significant shift that could give consumers firepower to keep spending next year.
If the Fed hadn’t already done that, there would be fear that it would eventually increase rates to the point where they would cause a recession.
Economic growth never goes into reverse in a slow recession, as was said by Moody’s. Unemployment would rise, but not spike.
With the Federal Reserve slamming the brakes on the US economy to snuff out inflation, business leaders and CEOs have grown increasingly confident about a 2023 recession.
Also, Wolfers says, as jobs were booming, inflation has been falling: it’s dropped from more than 9% to about 6%. The soft landing, he says, has landed.
Shoppers are the reason for an economy to skirt a downturn, according to economist Mark Zandi. “While the firewall is sure to come under pressure, particularly as financially hard-pressed low-income households struggle, it should continue to hold.”
Zandi also pointed to relatively strong fundamentals in the US economy, including profitable businesses, healthy consumer balance sheets and a banking system that is “on about as strong financial ground as it has ever been.”
The economy is free of troubling imbalances that were glaring before previous downturns, such as overbuilt real estate markets or massive asset bubbles, noted the Moody’s economist.
What are the Key Indicators of a Recession? The Case of Inflation and the Implications for the Future of the United States
The economy gets smaller during a recession and less stuff is produced. Normally, when that’s happening, you feel it, people get laid off, businesses shut down and everything starts going on super sale.
A lot of the most important numbers are in: jobs and unemployment data, data about prices, debt and credit, and (the big one) economic growth itself (aka Gross Domestic Product).
“We don’t know what’s happening” says Raguhram Rajan, an economist and professor of finance at the Booth School of Business. “This situation is relatively unprecedented.”
Inflation is at the root of the confusion. Last year, as inflation rose, the Federal Reserve took action to bring prices down by raising interest rates.
It is meant to slow spending when there is an interest rate increase. Higher interest rates make it more expensive for people and businesses to borrow money, so they borrow less, spend less and ultimately buy less.
Peterson says she’s looking at housing permits, consumer confidence, manufacturing data, factory orders and consumer spending, among other things. There are a lot of indicators that are indicating a recession.
There have been tens of thousands of layoffs this year, the price of basics like food has gone up and credit card debt is going up, consumers spent less than expected during the all important holiday shopping season.
What’s the reason? Because it was so difficult for companies to find workers for so long they aren’t planning to lay people off like they might in a typical recession. This recession may not look like other recessions.
Or there may not be a recession at all. The University of Michigan’sJustin Wolfers says that the whole recession talk he’s been hearing seems absurd.
Wolfers sees a soft landing in our country’s future: Demand for stuff might drop off a bit — enough to get companies to lower prices and bring down inflation — but not enough that they’d be losing a bunch of money and start shrinking significantly.
He says that unemployment is at a 50-year low of 3.4%. “These are levels that earlier generations of economists had said was impossible.”
Not only that, Wolfers points out that this kind of job growth is almost miraculous after what the economy went through just three years ago at the start of the pandemic.
I wouldn’t have paid that much attention if you had said, ‘In three short years, we’ll yield an unemployment rate you’ve never seen before’.
Rajan is concerned that if layoffs do get rolling companies will start to relax about finding people to fill jobs, and things might change really fast.
It’s not that difficult to find a job right now if firms look around. and we’re holding onto these people… Why don’t we clear the deck also,’ and everybody gets that idea at the same time. We could see hundreds of thousands of people lose their jobs all at once,” he says.
Rajan compares this risk to the old Wile E. Coyote cartoons. He ran off the cliff but didn’t realize it and then he looked down and realized he was over the cliff.
What can we learn from a clean school? A comment on Dana’s reply to Dana on “The economics of clean schools”
Dana says that economics is clean and neat in school. It does not assume that you have shocks or labor shortages. Economic models can’t always handle those weird things.