Many Indicators Imply A 2023 Recession, The Jobs Market Disagrees

There are many meaningful indicators suggesting that a U.S. recession is on the way. In contrast, the U.S. jobs market remains robust. That could change, but until it does, it’s potentially good news for the economy and markets.

3.7% Unemployment for November

The U.S. unemployment rate was unchanged at 3.7% for the month of November 2022. That is up slightly from a low of 3.5% in September, but still unemployment has been tight 3.5% to 3.7% range since March 2022.

It appears unemployment is no longer declining, but it’s not moving up either. All the chart below shows, U.S. unemployment is still close to some of the lowest levels in recent history.

Recession Risks

In contrast many other indicators are calling for a recession. The U.S. housing market appears to be weakening sharply. The yield curve is deeply inverted. Stocks and bonds have had a poor 2022 on concerns about inflation and weakening economic growth. Many leading indicators of economic activities are trending negatively too.

However, it would be unusual for the U.S. to have a recession without weakness in the jobs market. For example, economist Claudia Sahm has identified that the 3-month average of unemployment trending up its 12-month low by 0.5% is enough to signal a recession. We’re not there currently, though unemployment can move up by this small amount in a matter of months, if history is any guide, so just because unemployment is robust now, doesn’t mean that couldn’t change quickly into 2023. Still, for now the jobs market is one of the few major indicators that does not suggest a high near-term recession risk.

A Challenge For The Fed

The jobs market is creating a challenge for the Fed. The Fed wants to bring inflation down, and though inflation no longer moving up, inflation isn’t declining sharply either.

Part of the problem, in the Fed’s view is wage inflation from a tight labor market. The Atlanta Fed currently estimates wage growth at around 6% year-over-year and the Fed believes wage growth is probably helping fuel inflation in services.

The Fed has signaled that they are getting close to peak interest rates, likely in early 2023. However, if the jobs market doesn’t soften, then the Fed may have trouble getting inflation back to its 2% goal and may keep rates at high levels. We should be careful what we wish for, but some softness in the jobs market may enable the Fed to be comfortable ultimately lowering rates. We definitely aren’t there yet.

A U.S. recession in 2023 is becoming the consensus view. However, the jobs market remains resilient. It would be surprising and unusual to have a recession without unemployment moving higher. A recession may very well still come in 2023, but the jobs market suggests it’s not imminent.