Employment Remains Strong And Inflation Is Receding In Spite Of Recession Fears

Key takeaways:

• The American economy is doing well when we look at unemployment and inflation numbers. But the stock market isn’t – reminding us that the two are not the same.
• While there have been layoffs in the tech sector as of late, this sliver of the American labor market is relatively small. The vast majority of the job market is hot, though the headlines we’ve been seeing may lead us to believe otherwise.
• The pandemic continues, and as much as America tries to put it in the rearview window, the economic consequences faced by both our country and our global trading partners sow feelings of uncertainty about the future.

December’s employment and inflation numbers were pretty good – and when we look at the various metrics of the economy as a whole, it doesn’t appear that we’re headed towards a recession.

If that’s the case, why do things feel so tenuous?

Part of our general malaise may be because even though the economy is performing well, the stock market isn’t. To top it off, big companies that make big headlines have been experiencing layoffs, even though their employees only make up 2% of the American workforce.

Another source of fear is that the Fed is playing a dangerous (though arguably necessary) game. Raising rates to lower inflation runs the risk of sparking a recession. It’s one we haven’t seen materialize yet, however, and the most recent numbers indicate that the Fed may be able to pull off a soft landing.

Here’s what you need to know, and how Q.ai can help you navigate the uncertainties.

Employment numbers

Unemployment numbers were already down to pre-pandemic levels for several months, but in December 2022 they fell even lower to just 3.5%. In the economy as a whole, there are 1.7 jobs open for every unemployed American.

Hourly wage growth slowed down in December 2022, falling from 5% growth in September 2022 down to 4.6%. While that’s not spectacular news for workers, inflation is starting to slow at the same time.

Inflation is slowing

Even though Fed Chair Jerome Powell has acknowledged that there is no evidence that wage growth caused or boosted inflation, he has also frequently cited it as a reason the Fed has had to be so aggressive with rate hikes over the past 10 months. The decrease in wage growth, if it continues, may encourage the Fed to slow their pace of rate hikes.

Annual inflation peaked at 9.1% in June 2022. The latest numbers from November 2022 show a deceleration to 7.1%. This is still far from ideal as the Fed’s goal is to get it back to 2% or less. Even if it’s ‘not good enough,’ the slowdown is still meaningful. It indicates we are headed in the right direction.

If things are good, why do they feel so scary?

If we look at the indicators the National Bureau of Economic Research (NBER) takes under consideration when officially declaring a recession, things still look good. There aren’t currently too many factors that would indicate a recession aside from inflation.

Then why do things feel so uncertain? There are a few factors at play.

The stock market is not the economy

If you’re heavily invested in the stock market, this past year probably felt financially painful. While the economy has been in a process of recovery, the stock market has floundered. Many people conflate the two, thinking that a downturn in the stock market automatically indicates a recession. But in reality, the two are untethered, even if they overlap from time to time.

For an example of this, all we have to do is look back to the beginning of the pandemic in 2020. At a time when unemployment reached double digits and food bank lines wrapped around American cities, the K-shaped recovery had the stock market skyrocketing.

What’s happening right now is the inverse. Over the past year, the same factors that have been pushing inflation down have negatively impacted investor sentiment. Higher interest rates mean that future returns on investments decrease, even as the rates on bonds rise. The conservative option starts to look better than comparatively volatile stocks.

And so the stock market suffers. It’s not just the abstract idea of the stock market, either. Real companies with real employees can adversely suffer under these conditions, especially if they perform work in specific sectors.

The tech sector has taken multiple hits

Big Tech is woven into everyone’s everyday lives, so news stories about tech layoffs in the thousands appear to be a bigger deal than they actually are. Some of these layoffs come with simultaneous hiring frenzies as companies restructure, but to be fair some have been straight contractions.

The tech sector is particularly sensitive to stock market swings, as their products are seen as high risk. It’s difficult for them to attract investor dollars unless stock market sentiment is rosy.

This sector also has outsized business relations with China compared to other sectors of the American economy. Trade policies between China and the U.S. have become restrictive over the past year.

Even with the cumulative tens of thousands of layoffs, the tech sector only represents 2% of America’s job market. America’s job market is strong, even if the tech sector is uniquely suffering.

Contraction is a consequence of waning inflation

A consequence of the Fed raising rates is lower inflation, but that lower inflation is achieved by a general market contraction. Part of the reason so many have been worried about a recession is because it’s a finicky game the Fed is playing. The line between successfully lowering inflation and tipping the country into a recession is a thin one.

Over the past month,more economists have become optimistic that the U.S. may be able to avoid a recession even in a high-interest environment. Our saving grace is the job market.

While it appears unemployment won’t be a problem in the near future, it will be interesting to see if wage growth continues to slow. When inflation is 7.1%, even 4.5% wage growth isn’t enough to keep up with the cost of living. If that gap gets bigger, it could spell trouble for the average American consumer.

The thing none of us want to acknowledge

While Federal policy is moving us further away from acknowledgement of the pandemic with every passing day, the fact of the matter is that it does still very much affect our lives and the larger economy.

Sick leave and bereavement policies have taken center stage over the past year because so many Americans have fallen ill, and there is less support for employees who need to stay home to recover than in prior pandemic years. Long COVID causes disability and death, which are both problems when they affect the workforce.

Even if the United States were actually done with the coronavirus, other countries are decidedly not. In our global economy, the spread of disease in China absolutely affects supply chains and markets around the world, including the U.S. While China is not the only country grappling with this virus, it does produce one of the world’s leading GDPs.

The bottom line

We may yet dodge a recession in 2023. But even if we do, the economic atmosphere is strange despite all the good news.

It’s particularly uncomfortable if you have a large amount of money invested in the stock market. If you’re a long-term investor, hopefully you have the perspective that this too shall pass. Over longer time horizons, the stock market has historically gone up. There is a bump in the road right now, but these bumpy times are to be expected and should be built into your plans.

If you want to invest even during times of market downturns, it might be helpful to pair Portfolio Protection with your Investment Kit. This Q.ai product allows you to protect your gains and hedge against the worst potential losses.

Download Q.ai today for access to AI-powered investment strategies.