Debates are still raging over whether the economy is in a recession. While the economy has met one litmus test for a recession of two consecutive quarters of negative growth in GDP, or gross domestic product, doubters point to the still strong job market. In recent months, hundreds of thousands of jobs have been created, and unemployment remains very low.
This situation has raised an interesting question. Could a recession happen, but the labor market doesn’t participate? That is, for the first time in my memory, could we have a recession without big job losses and jumps in unemployment?
It’s an interesting question that has already created differing opinions among leading economists. Some top economists think a recession today will be just like those in the past, where many jobs were lost and the unemployment rate soared. Excluding the 2020 recession induced by the pandemic, in the recessions since 1980, unemployment jumped an average of 3% and the jobless rate rose an average of four percentage points. Today, some economists are predicting the unemployment rate may reach 7% - double the current rate – in a recession brought on by a goal of reducing the inflation rate to 2% annually.
But, not surprisingly, other economists disagree. Currently there are almost two job openings for every unemployed person. That is unprecedented, especially during what – some claim – is already a recession. The current level of job openings is almost 11 million, equal to 7% of filled jobs. This is more than enough to allow businesses to cut unfilled jobs, rather than filled jobs, and meet the job losses that come with the average recession.
Indeed, this is exactly what some economists think will happen. One respected economist predicts we will see, at most, a one percentage point increase in the jobless rate in the coming months. We could therefore have a reduction in economic production – which is one definition of a recession – while experiencing a very, very modest increase in unemployment.
If this situation happens, would we actually see no recession declared? The National Bureau of Economic Research (NBER), a century old private think tank, makes the official calls on recessions. NBER looks at six measures in deciding if a recession has occurred. They are: the change in earned personal income in excess of inflation, the change in personal spending in excess of inflation, the change in non-farm payrolls, the change in household employment, the change in manufacturing and retail sales in excess of inflation and the change in industrial production.
Before discussing trends in these measures, let me explain the difference between the two employment measures. The government does two job surveys each month. The payroll survey is based on results from a sample of 400,000 businesses, but not including farms. People on business payrolls are counted as employed.
The household survey relies on a much smaller sample of 60,000 households. However, the household survey is broader, including not only workers on farms, but also self-employed workers, unpaid family workers, workers in private households and workers on unpaid leave. The household survey, therefore, captures more types of jobs, but it’s based on a much smaller sample.
The payroll job survey has continued to move higher, but the household survey of jobs peaked in March and is slightly lower since then. Personal income has continued to rise, but there are signs of leveling-off for personal spending. The production index has been gaining, yet manufacturing and trade sales have been dropping.
So, with three (household job survey, personal spending, manufacturing/trade sales) of the six key measures followed by the NBER suggesting some weakness, there is reason to watch the economy for deepening signs of a recession.
But if a recession does occur, will it be a typical recession with all six indicators – and especially the two job indicators – showing significant deterioration? Like so many aspects of our lives impacted by the pandemic, I think a case can be made that the next recession will be different.
Imagine this scenario. Production, sales, spending and income trend downward in the next six to nine months as the Federal Reserve raises interest rates to control inflation. But with improvements in the supply chain, falling oil and gas prices, and a more modest inflation rate of between 4% and 5%, the Fed will declare victory, stop raising rates and hint about actually lowering rates over the coming year.
With economic optimism returning, businesses that have stopped hiring new workers will now begin worrying about a return of labor shortages as the economy improves. Hence, they keep their labor staff intact and few – if any – workers are let go. The unemployment rate barely rises, making the recession the first one on record occurring without a major jump in joblessness.
Is this a fantasy? Perhaps. But it wouldn’t be the only unusual event created by the pandemic. The COVID-19 pandemic has changed the workforce, altered how we buy both products and services, and broadened remote working and remote living. Is our definition of a recession the next post-COVID change? Could we experience a recession without massive unemployment? You decide.