Why is employment growth so strong? Gad Levanon: Why the US economy is holding on well and why it is going to go into a recession

Editor’s Note: Gad Levanon is the chief economist at the Burning Glass Institute. He’s the former head of The Conference Board’s Labor Market Institute. The opinions he gives are of his own.

Why is employment growth so strong? First, the US economy is holding on better than many expected. The Atlanta Fed predicts real GDP growth to be 2% in the third quarter of 2022, less than the 2.5% recorded last year but still good news for the economy. When the demand for goods and services strengthens, so does the demand for workers producing these goods and services.

This tight labor market – and the rapid wage growth it has spurred – is causing inflation to become more entrenched. The consumer price index was up 8.3% in August. That’s lower than the 40-year high of 9.1% in June, but still painfully high. The Federal Reserve is likely to cause the economy to go into a recession in the next few years.

Contrary to popular belief, layoffs are still historically low despite the slowing of the economy. One of the lowest initial claims for unemployment insurance readings in decades were for the week of October 1, when 219,000 were filed, which was higher than the week prior but still lower than the previous week. Many companies are reluctant to reduce the number of workers even though their businesses are slowing after many years of traumatic labor shortages. When companies start growing again, they worry that they will not be able to find enough new workers.

Some industries are growing because they have caught up but others are growing as they adjust to a new normal of higher demand. Demand for data processing, hosting, and other services is higher than before the Pandemic. And it’s likely that these represent structural changes to buying patterns that will keep demand high.

Next year, however, will look very different. There are many industries that still have employment levels that are close to what they were before the outbreak of the Pandemic. With demand saturated, those industries may revert to slower hiring. There isn’t much that can push job growth into negative territory. Monetary policy will do that.

The labor market can either be reined in with reduced demand or it can be raised with more workers. It is difficult to increase labor supply. That takes the kind of legislative action needed to increase immigration, drive people into the labor force or grow investment in workforce training. This is likely to prove elusive in today’s polarized political environment.

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Almost every chief executive in the survey is prepared for a downturn in the US and almost every one is prepared for a downturn in Europe.

Fed officials, like Chair Powell, still say they can nail a soft-landing where high inflation doesn’t push the country into a recession. But policymakers, economists, and investors agree that path has gotten narrower, and most business leaders expect the landing will be a little rocky, at least.

Steve Odland ran Office Depot before he became The Conference Board’s CEO and he said companies want to cut back on overhead because of the economic downturn.

Meta’s Mark Zuckerberg has reportedly told his staff to expect layoffs in the near future. FedEx is closing its stores and cutting back on deliveries after its CEO warned of a global recession.

David Rubenstein, co-founder of The Carlyle Group and author of How to Invest: Masters on the Craft, does not believe in a Great Recession.

It’s safe to say that the global economy is in a pretty bad place right now: The vast majority of economists think we’re on the brink of recession. But US markets don’t seem to mind. The rally on Monday was the best week for the stock market since June.

Right now, people are still spending, and many of them are not overextended. On top of that, companies have sound balance sheets, and the jobs market is incredibly strong. In September, the unemployment rate fell to 3.5%.

Almost half of those surveyed said they plan to hire more workers over the next 12 months, and 85% of them said they expect to boost pay by 3% or more.

“That is unprecedented from this group, going into a recession,” says Odland. You would typically hear that they’re cutting back. They aren’t going to increase wages.

The United States has had negative growth for two straight quarters, so this is considered a good indicator of when the economy is in a recession. But it is actually up to a non-profit group not tied to the government, the National Bureau of Economic Research, to officially determine that the economy is, in fact, in a recession. It could take several months to determine that.

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So what gives? The Federal Reserve has created two economies by releasing money to banks, argues Nomi Prins, who was a former managing director at Goldman Sachs. Wealthy Americans and corporations benefited directly from years of low rates, which kept money flowing into businesses and stocks high while Main Street suffered from decelerating wages and little support. Prins says we are now dealing with a “permanent distortion,” where market behavior and economic prosperity have nothing to do with each other.

The stock market has always been unpredictable. Analysts and economists try to prognosticate or apply some type of rational explanation to market moves, but the reality of it is that it’s often conjecture (strong, educated guesses but still guesses).

The Fed is mandated to keep unemployment and prices in check, but also to boost markets, which is another unofficial mandate. Over the last 14 years we have seen that. Beginning in 2008, interest rates for overnight bank borrowing in the United States were set low, near zero, and Fed officials pursued an aggressive monetary easing policy, where they infused money into the financial system by purchasing Treasury securities from the US Government. That created a pervasive idea in the finance world that the stock market would go up no matter what, she explained.

The bulk of this stimulus flowed upwards into markets and not outward into the economy at large and created a world where investors became dependent on the Fed while the larger economy suffered, said Prins.

The credibility problem: When the Federal Reserve began raising rates earlier this year, officials publicly explained how important their credibility is to successfully lowering inflation rates. If the Fed is to succeed, they said, Americans would need to believe that the central bank is steadfast in its fight to bring down prices.

But investors aren’t convinced, says Prins. That’s why they continuously appear to think a policy pivot is coming even when the Fed says it isn’t. They understand, says Prins, that eventually the Fed will return to its long-term policy of aiding markets.

Meanwhile, she says, it’s Main Street, not Wall Street, that’s feeling the brunt of these interest rate hikes, through increased mortgage and borrowing rates and a slowing jobs market.

According to the survey released Monday, more than half of the respondents thought America was likely to experience a recession within the next year, while only 1% thought the nation was already in one.

The high inflationary environment has resulted in price hikes by companies — 52% of respondents said the prices their firms charge were up in the third quarter — but the latest survey indicates that some prices are starting to come back down. The share of respondents who said prices were falling was 9%.

Shortages of raw materials and labor continue to hinder businesses’ operations, according to the survey. The percentage of respondents reporting shortages was close to record levels.

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Rishi Sunak, Britain’s third prime minister in seven weeks, will face the huge challenge of projecting stability after a period of historic political and financial market chaos. As Julia reports, his job of shepherding the country through a recession is slated to be just as difficult.

Sunak campaigned for the job over the summer with promises to help households tackle the rising cost of living, which is causing many to pull back spending. He said he would cut taxes, but only once price pressures eased.

Yet the economic outlook has deteriorated sharply since then — not least because of the market turmoil unleashed by Truss’ now-abandoned plan to slash taxes as soon as possible and boost government borrowing.

The third quarter earnings are reported by Microsoft, Visa, and other companies after market close.

October Consumer Confidence is expected to be released by The Conference Board at 10 a.m.

While investors, business leaders and some economic models continue to warn a recession is imminent, Wall Street’s most powerful investment bank remains cautiously optimistic.

“We still see a very plausible non-recessionary four-step path from the high-inflation economy of the present to a low-inflation economy of the future,” Goldman Sachs chief economist Jan Hatzius wrote in a report.

The economic growth transition has already occurred, and it looks durable, according to Goldman Sachs. Gross domestic product is expected to grow by 1% over the next year.

Goldman Sachs concedes that there has been “much less progress” on the price side. Inflation metrics have mostly stopped getting worse but they also haven’t really got any better either.