The few remaining signs that the US economy is headed for a recession are vanishing before our eyes.
Until recently it has been possible to squint at the data and see emerging weakness amid the headlines showing steady job growth. Now three of the most important such signs — downward revisions to the payroll data, a slowdown in rising claims for unemployment insurance, and an imbalance between job seekers and job openings — have withered away. As a result, there is little remaining reason to expect a recession this year, if at all.
Job growth in the private sector has been slowing ever since the Federal Reserve began raising interest rates early last year. In the year leading up to February 2022, the US economy created an average of 620,000 jobs a month. By September of this year, that figure had dropped to 268,000.
Part of this was intentional — the Fed was trying to decrease the pace of job growth — but there were signs that it may have been overdoing it. The first was the record string of negative revisions to private-sector jobs at the beginning of this year.
The Bureau of Labor Statistics sends a survey to more than 100,000 businesses every month asking how many employees they have hired or let go. Many firms respond late or not all. To account for that, the BLS uses a statistical model that estimates what those businesses would have answered based on recent trends. Then, as some late responses arrive, the BLS revises its estimate. If its model is performing well, then the revisions should average out to zero.
But when the economy makes a sharp turn downward, the estimates based on the recent past will tend to be high. That’s precisely what happened at the beginning of 2023: The BLS’s estimate for jobs created in January and February were eventually revised downward by 45,000 and 63,000 respectively.
Over the next several months, the downward revisions improved slightly but were still negative. Then in July, the last month for which updates are complete, the revisions flipped: They were revised upward, by 49,000. August revisions are also expected to positive.
What does all this mean? It is a subtle but crucial sign that a downward turn in the labor market has ended. That hypothesis is corroborated by data on initial claims for unemployment insurance.
Layoffs tend to increase steadily in the months preceding a recession. And between January and June, the four-week average of initial claims for unemployment climbed from just under 200,000 to 256,000. An increase of 56,000 over six months would be consistent with a labor market edging toward recession.
Yet in July, the four-week average began falling, and by the end of September it was at 209,000.
Finally, there are promising signs that the fundamental imbalance in the labor market — between those looking for jobs and available jobs — is clearing up. In 2021, the number of job openings reached a record high. Employers reported having trouble finding workers. Predictably, as employers competed for limited workers, wages started to rise.
A rise in wages seems like good news, but when it’s caused by a shortage of labor rather than improvements in productivity, increasing wages feed increasing inflation. Employers simply pass on the higher labor costs to customers in the form of higher prices.
The Fed promised to do whatever it took to stop this dreaded cycle, known as the wage-price spiral. Job openings have been slowly declining for nearly two years, but wage growth has stayed between 3.25% and 5.25% since early 2022.
In August, however, wage growth slowed to a 2.8% annual rate — and in September it fell to 2.5%. It’s still too early to tell whether these sharp drops will continue, but it is striking that they occurred at the same time as other signs of labor-market dysfunction are easing.
The most optimistic story is that the dysfunction that has defined the labor market since Covid is disappearing as both employees and employers adjust to the changes brought on by the pandemic. Even if that optimism is premature, it’s encouraging that these three signs of underlying weakness in the labor market are fading. As they do, so is the likelihood that a recession is just around the corner.
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