New Jobs Data Friday- How Is Employment Tied To A Recession (Does This Officially Tip Us In)?

Key takeaways

• The U.S. unemployment rate went up in August for the first time since April 2020. The jump wasn’t nearly as large, though; the reasons for the jump are positive economic indicators.
• Unemployment numbers don’t account for people who aren’t looking or can’t look for jobs, like the two to four million people not working due to long COVID or women leaving the workforce for other responsibilities since the beginning of the pandemic.
• The U.S. is currently not in a recession, but we’re on shaky ground. There are reasons to be optimistic, but several factors demand attention, like job listings with inadequate pay and a marked slowdown in hiring.

To determine if we are in a recession, economists generally look at three factors: economic output, consumer demand and unemployment.

A decreased economic output is normally defined by two consecutive quarters of decreasing GDP. The U.S. met this bar with decreases in GDP in Q1 and Q2 of 2022. Still, consumer demand was measured positively, and unemployment levels over the first two quarters of 2022 consistently fell to pre-pandemic levels.

In August, though, unemployment went up. The context of this recent increase in unemployment doesn’t necessarily indicate we’re in recession territory, but that could change quickly. Friday’s jobs report will certainly move the market but will it have the broad sweeping effects we think it will? Here’s what investors need to know.

August unemployment was the highest jump since April 2020

In August 2022, the jobless rate jumped from 3.5% to 3.7%. This unemployment rise was the largest jump since April 2020, but it is not a cause for panic. The increase isn’t nearly as high—0.2 points in August of 2022 versus 10.3 points in April of 2020—and the circumstances surrounding these statistics are entirely different.

Unemployment insurance records don’t measure the unemployment rate. Instead, it’s measured by the Current Population Survey (CPS). This monthly government survey can include people claiming unemployment, but it also includes people actively looking for jobs that are not yet employed and who may not currently receive unemployment benefits.

The August 2022 unemployment uptick can be attributed in large part to the 786,000 Americans newly able to pursue employment who hadn’t found it yet.

Understanding unemployment in a larger context

The numbers indicating more people are entering the workforce still don’t paint the entire unemployment picture. COVID-19 and its associated socioeconomic consequences have skewed the numbers a bit.

• Not included in unemployment statistics are those unable to pursue employment. There are currently anywhere from two to four million Americans out of the workforce due to “long COVID,” with tens of thousands of new infections daily.
• Since the start of the pandemic, more than 350,000 working-age adults have died from COVID-19, according to the NCHS, furthering the labor shortage.
• The Biden administration abruptly ended expanded unemployment benefits in September 2021, cutting off an estimated 7.5 million jobless workers from benefits.
• Nineteen states took federal government announcements in the summer of 2021 as permission to end their programs early, with the earliest program endings happening in June of 2021.
• From June to October of 2021, the unemployment rate dropped from 5.9% to 4.6%, with several of the 7.5 million jobless people accounting for a portion of this decline. Many of them could not pursue work, eliminating them from the unemployment numbers.

Is employment strong?

Currently, employment is strong. We are in a tight global labor market, which means there are more jobs than workers available to fill them.

Part of the increase in job availability is likely because of the overall loss of available workers due to COVID-19 and its associated effects. This is not typically accounted for when we think of tight labor markets, but we live in extraordinary times.

A tight labor market would be good for workers in an ideal scenario. It would mean they could demand more pay, more flexibility and better benefits. Unfortunately, that’s not what we see happening.

Many companies have started cutting job listings or slowing the hiring process. This is a troubling trend that could impact the economy or tilt us closer to a recession in the future, but for now, the employment statistics remain fairly strong on the surface.

What is the significance of employment right now?

Current employment trends indicate the labor market may be slightly loosening, with more available laborers in the workforce. Whether that translates to people getting good jobs with sustaining pay in the current inflationary environment has yet to be seen.

The reasons behind the uptick in unemployment numbers are positive, but America’s economic health is fragile.

Where do we go from here?

The Federal Reserve is working to stem inflation by increasing interest rates quickly. When rates rise quickly, there’s a good chance that employment will take a hit as companies tighten their budgets. A strong dollar is also hampering the profits of global companies based in the U.S., further adding pressure to improve profits.

There’s a good chance unemployment rates will rise as the economy cools from a vast overheating. Hopefully, we can achieve the “soft landing” the Fed originally wanted. Many analysts are touting the importance of the wage data over the jobs number itself. That’s a big maybe. For context, before the pandemic, wages typically grew 3% year-over-year. Average hourly wages have grown 5.2% according to the August jobs report, down from 5.6% in March 2022. The thinking here goes that the Fed will have to be more aggressive tamping down inflation if wages fall too far behind inflation, meaning the price of the items we all need. It’s a fair point, but whether that’s more important than the number of people working is thin.

Smart investors will ask, what does it mean for market sentiment, the type of sentiment that could easily undo Monday’s rally (looking good so far today still) or send us toward a Q4 rally?

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