The July jobs report sent shockwaves through the economy, fueling fears that the Federal Reserve’s efforts to combat inflation may have come at the expense of the labor market. Job openings and hiring have slowed significantly, indicating a tightening labor market. However, Noah Yosif, the chief economist at the American Staffing Association, offers a more balanced perspective.
“The markets had a knee-jerk reaction to the July numbers, but when they stepped back and looked at the bigger picture, they corrected course,” Yosif says. “While July’s numbers were not great, the labor market remains quite healthy overall.” He points out that despite the higher unemployment rate, it is still at a very healthy level. Yosif also notes that worker productivity is increasing due to higher borrowing costs, and wages are rising faster than inflation.
We’re seeing smaller declines in the staffing industry each month, which suggests the labor market may plateau and rebound once interest rates start to slow down,” he adds. Although there has been a slowdown in job hopping, sectors such as healthcare and government services are experiencing significant labor churn at healthy levels. Yosif concludes with an optimistic outlook for the labor market, suggesting potential rebounds once the monetary policy environment becomes more favorable.
July’s job numbers create economic concern
A new economic indicator developed by economists Pascal Michaillat and Emmanuel Saez suggests a 40% probability that the US economy is already in a recession, possibly starting as early as March. This measure expands on the Sahm rule by incorporating job vacancy data alongside unemployment data.
The original Sahm rule considers the US to be in a recession if the difference between the three-month moving average of the unemployment rate and the past-12-month low is at least 0.5 percentage points. The weak July jobs report triggered this rule, showing a 4.3% unemployment rate. Michaillat and Saez’s new measure retains the Sahm rule’s methodology for unemployment but adds the difference between the three-month moving average of the vacancy rate and its past-12-month maximum.
A difference of 0.3 percentage points indicates a likely recession, while a difference of 0.8 points confirms it. Using July data, the new indicator recorded a difference of 0.5 percentage points, suggesting a 40% chance of a recession that could have begun in March. Michaillat and Saez claim their indicator has effectively identified recessions dating back to 1930, while the original Sahm rule is reliable only from 1960 onwards.
Claudia Sahm, the economist behind the original Sahm rule, acknowledged the unique challenges posed by the pandemic-influenced economic cycle and its impact on economic models. She expressed enthusiasm for the development of improved methodologies, saying, “What I am so looking forward to is someone deciding it’s great to have something like this and is motivated and goes off and does it better.”
This new recession indicator could provide valuable insights for economists and investors, helping them make more informed decisions in the face of potential economic downturns.
