4 changes in the economy to watch if you’re worried about a recession

The economy is confused right now. Many economists predict the United States will fall into a recession next year. Inflation remains high and the Federal Reserve continues to aggressively raise interest rates. But the labor market is still standing: Employers are struggling to fill vacancies and unemployment remains low.

A jobs report released on Friday showed that, despite the dim outlook, the labor market is growing and remains a bright spot in the economy.

According to a report by the Bureau of Labor Statistics, employers added 223,000 jobs to the economy in December. That was a slowdown from the previous month, when employers added 256,000 jobs, but slightly more than economists expected.

It usually takes several months for the effects of a Fed rate hike to fully manifest in economic data. By making it more expensive to borrow money, the Fed is trying to reduce demand and get consumers to spend less. That should help reduce inflation over time, but it could also lead to businesses ramping up hiring or laying off workers.

So far – despite recession concerns and predictions – labor market data does not suggest the US is on the verge of a recession. Here’s a guide to some of the key numbers that economists are watching closely.

1) Job growth

Although job growth is slowing and November’s gain has been revised downwards, employers are still adding a large amount of jobs to the economy each month (in 2021, job gains higher because the economy is more likely to bounce back from the previous high unemployment rate during the pandemic). It will start to get into trouble if the economy begins to see job losses that persist for several months, economists say.

Because job openings remain high and there aren’t enough workers to fill them, Fed officials say they believe job growth is likely to slow without the country seeing a rate hike. unemployment increased dramatically. For example, employers can vacate positions instead of firing workers. The Fed is deliberately weakening the labor market, in part to ease pressure on wage increases, which should help reduce inflation.

Mark Zandi, chief economist at Moody’s Analytics, said the Fed will likely be “quite pleased with” monthly job gains falling to any number between 100,000 and zero.

“At that rate of job growth, you should see the unemployment rate rise gradually, but not fast enough to cause a loss of confidence in the economy and a consumer pullback,” said Zandi.

Aaron Terrazas, chief economist at Glassdoor, said a few months’ worth of net job losses would be a worrying sign of the pain ahead for workers. However, he noted that the economy still has a “fairly long way to go” before a recession given the strength of the labor market and that the United States can avoid a recession.

“It’s definitely something you can worry about,” says Terrazas.

2) Unemployment rate

Many economists cite the “Sahm rule,” which measures whether the unemployment rate has risen sharply, as a criterion for whether the economy has fallen into a recession. Under the rule, created by former Fed economist Claudia Sahm, a recession is triggered when the three-month average unemployment rate rises half a percentage point from its lowest level in the past 12 months.

That didn’t happen. The unemployment rate remained low and fell to 3.5% in December, according to Friday’s report. That is down from 3.6 percent the previous month and the lowest level in half a century.

However, higher unemployment can be driven by various factors, such as more workers quitting and starting to look for work. Nick Bunker, director of economic research for North America at Indeed Hiring Lab, says the underlying data will help determine why and how unemployment is rising. For example, it is important to examine data on the number of workers moving from unemployment to employment in the next month, which can be used to calculate the rate at which workers find work. unemployed, he said.

“If that number continues to trend lower and lower, that would be a sign that unemployed workers are having a hard time finding work, which is a negative sign,” Bunker said. for the labor market.

3) Unemployment claim

Unemployment claims can be one of the first harbingers of an economic downturn. Economists track claims as a proxy for layoffs, as the data is released weekly and is more timely than other monthly government reports.

Jobless claims typically average around 250,000 per week in a more normal economy with a balanced labor market, said Zandi at Moody’s Analytics. If the number of jobless claims rises to nearly 300,000 per week, he said, that would be consistent with a recession.

Jobless claims fell to 204,000 for the week ending December 31, down 19,000 from the previous week, according to Labor Department data. Unemployment claims in 2022 remain low from previous levels, indicating a tightening in the labor market: Last year’s claims peaked at 261,000 in the week ended 16. July.

4) Layoffs, job opportunities and quit rates

Data on layoffs, job openings and the number of workers quitting also help economists learn more about the strength of the labor market and are published in the monthly BLS report.

The number of layoffs remained low at 1.4 million in November (compared to nearly 2 million in February 2020, before the pandemic hit). The number of people quitting their jobs is also higher than usual. In November, 4.2 million people quit their jobs and the quit rate stood at 2.7%, according to the most recent report. Job openings remained at a high of 10.5 million in the same month.

Bunker at Indeed says the quit rate is an important indicator to watch because it highlights how confident workers are in their ability to leave their current job and find a new one. Bunker said the unemployment rate in the private sector is still about 16% higher than the 2019 average.

“It’s hard to see an impending recession if people are still voluntarily leaving their old jobs at a high rate,” Bunker said.

However, monthly data can bounce, and Bunker said he’d like to see changes in the months before he becomes more worried about a recession.

“You would need to see a long period of gradual recession or a sharp reversal for any of the labor market indicators to sound the alarm,” Bunker said.