Why you shouldn’t worry about the job market and a recession just yet

The unemployment rate is at its highest level in nearly three years, but some economists say the US economy has a good chance of avoiding a near-term recession.

The labor market is trending in the wrong direction, but it might not be time to sound the alarm just yet.

The unemployment rate has risen for four consecutive months and at 4.3%, it’s the highest it’s been in nearly three years. Investors are voicing recession concerns, and there’s been discussion about whether the Federal Reserve should deliver an emergency interest rate cut to boost the economy.

However, there are some reasons it might be too soon to freak out about the labor market. First, by some measures, it’s as good as it’s been in decades.

Despite the rising unemployment rate, 80.9% of Americans between the ages of 25 and 54 were working as of July, according to the Bureau of Labor Statistics. The last time it was higher than this was in March 2001.

Secondly, a few days after the unemployment figure was released, the Labor Department announced that the number of Americans filing new applications for unemployment benefits declined more than was projected, easing some fears about the labor market.

But even before this data was released, some economists were already arguing that concerns about a recession and a tanking job market were overblown.

In a note published on August 4, Goldman Sachs economists David Mericle and Manuel Abecasis wrote that they viewed the increase in the unemployment rate as less concerning than many other experts for three reasons.

First, 70% of July’s unemployment increase was tied to temporary layoffs which “might reverse and are not a good recession predictor,” they wrote. Second, the rate of “permanent layoffs” remains low relative to past levels, reducing the odds of a “vicious circle of income loss and reduced spending.”

Third, some of the uptick in the unemployment rate can be attributed to “job-finding challenges for new immigrants.” Immigrants have accounted for much of the growth in the US labor force in recent years, and new immigrants tend to have a higher unemployment rate during their first years in the US compared to other workers, according to Goldman Sachs.

However, in a note published on July 28, the bank’s economists wrote that there was no “clear evidence” that the addition of recent immigrants to the labor force had “raised the unemployment rates of native-born workers or earlier groups of immigrants.” This means that while some recent immigrants have struggled to find work, it’s not clear that — by competing with other workers for jobs, for example — they’ve been responsible for other workers entering unemployment.

Lastly, if the labor market weakens further, Federal Reserve interest rate cuts could help stimulate demand in the economy, the economists said.

It’s not just Goldman Sachs that’s called for calm.

Satyam Panday, chief US economist for S&P Global Ratings, said in a note published on August 6 that the slowing labor market appears to suggest a “normalization” of a previously red-hot labor market, rather than an “economy that’s about to slip into a recession.”

Michael Gapen, chief US economist for Bank of America, said in a note published after the July jobs report that a recession is “highly unlikely.”

“The US does not have recessions without layoffs picking up sharply,” he wrote.

To be sure, there are plenty of reasons to remain concerned about the state of the labor market. While the layoff rate might be low relative to past levels, Americans who aren’t working are having a harder time finding jobs.

And there’s no guarantee layoffs won’t pick up. Last week, JP Morgan raised its odds for a “US/global recession” starting before the end of the year to 35% from 25%, and Goldman Sachs revised its odds of a recession over the next 12 months to 25% from 15%.

Additionally, when the unemployment rate starts rising like it has in recent months, it can be difficult to slow it down. When people are laid off and cut back their spending, this can increase the odds of layoffs in other industries. And when economic conditions deteriorate, most companies can shed workers quickly. In 2021, Federal Reserve Bank of San Francisco economists wrote that “unemployment rises like a rocket and falls like a feather.”

What’s more, the rising unemployment figure in the July job report triggered the “Sahm rule,” a recession indicator created by economist Claudia Sahm that when backdated, has a pristine track record of identifying recessions in real time over the past 60 years.

However, Sahm, a chief economist at New Century Advisors and former Federal Reserve economist, told B-17 that this could be one of the rare instances where her recession indicator is wrong.

“The US economy is still growing,” she said. “We are still adding jobs. We are spending even after inflation.”

In the months ahead, the trajectory of the unemployment rate — and the Federal Reserve’s response to it — are among the key factors that could indicate whether recent concerns about the economy were indeed overblown, or whether the US has a more serious problem on its hands.