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US: A 'Jobfull Recession'?

The US used to suffer from ‘jobless recoveries’ (the 1990’s and early 2000’s). The latest data seems to suggest a ‘jobfull recession’. Non-farm payrolls have risen 3.3 mn since December, with July adding a bumper 528k. Yet the first half of the year saw a decline in GDP, a recession on one definition.

How can GDP be negative while the economy creates so many jobs? Three ways. First, the payrolls data could be wrong. Data often gets revised substantially at turning points. The household survey of employment, which is entirely independent of the establishment survey normally quoted, shows employment flat since March, a very different picture (see green circle in chart).

Secondly, we know employment is always a lagging indicator. It usually flattens out just before a recession and only falls after the recession starts. But this time that is likely even more true because there is a backlog of hiring. Jobs on offer have turned down but remain very high. And the National Federation of Independent Business survey finds that small firms are pessimistic about prospects but still want to hire. While optimism has plummeted, hiring intentions remain fairly high (see chart). It seems firms want more staff just to keep going as they are.

Thirdly, economists usually reckon that strong hiring makes a simultaneous recession implausible because people newly employed are likely to increase their spending. But maybe not this time. Many people enjoyed large transfers from the government over the last 2 years. Perhaps they were able to maintain their spending while unemployed and only need a job now because their benefits and savings are drying up.

The bottom line is that the jobs data are likely highly misleading as to what the economy has been doing. The economy may not ‘really’ have been in recession in H1 but it has certainly been weak, despite rising employment.

Looking forward, the backlog of positions still to fill may mean that the jobs data continues to diverge from the activity data. For my money it is better to focus on leading indicators (not jobs, a lagging indicator). As I blogged a couple of weeks ago, the Conference Board’s Leading Indicator Index is pointing downwards. I reckon a recession is 75% likely this year with the start probably to be dated to sometime in Q3, when the NBER Recession Dating Committee eventually gets around to it (likely sometime next year).


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