Recession Minus Unemployment
“A Messy Transition”
Persistent Inflation + Inverted Yield Curve
Cleveland, British Columbia, and Dallas
It’s a recession! No, not yet! I see these arguments everywhere and I’m already tired of them. For those who believe it is not yet a recession, I will make a deal with you. The third quarter is likely to be negative. When we have three quarters of a recession in a row, just give it up.
Here’s what we know: Inflation is rising, growth is weakening, and the Fed is tightening. All these seem likely to persist, though to varying degrees and with occasional breaks. That means recession is coming, if not already here.
“In 1998, MIT economist Rudi Dornbusch observed that ‘none of the post-war expansions died of natural causes, they were all murdered by the Fed.’ The motive for this murder is usually to save the economy from incipient inflation by killing the economy.”
(That’s from a new research paper we will discuss today.)
As I noted last week, this will be A Weird Recession. The post-2008 expansion phase was unusually long and unusually weak. It ended not because the economy overheated but because COVID triggered the unusually deep yet brief 2020 recession.
Now we have other elements, like a war raising global food and energy prices and re-ordering geopolitical relationships, supply chains, a stressed labor market, etc. Not to mention a more dramatically inverted yield curve.
Today we’ll explore some of the factors in this recession (or whatever you want to call it). This will be a deeper dive into the issues I raised last week. We have more challenges and mysteries than I can describe in a single letter.
Recession Minus Unemployment
The most obvious weirdness factor going into this recession is the still-strong employment data. Employers are hiring people faster than they are firing them, and many wish they could hire more. That doesn’t square with recessionary conditions.
This may be because the recession is still young. A reader sent me this chart in response to last week’s letter. It shows the unemployment rate with arrows pointing out a bottom just ahead of each recession (the shaded areas).
Source: Richard Vesel
Richard said in his note, “Low unemployment and frenetic activity ARE precursors to recession: they are evidence of an overheated economy, and inflation is one additional, although not necessary, symptom.” A fair point. Higher unemployment may be coming but it’s not here yet. Here is the same data, zoomed in to show the last four years.
The market was expecting July job growth of 250,000. It got 528,000 plus another 28,000 in positive revisions for prior months. The labor force shrank slightly, helping the top-line unemployment rate drop to 3.5%, matching the 2019 low which was the lowest since the 1950s. While wages rose, participation rates dropped in the especially critical 25–54 age category.
This doesn’t seem like recession, at least not yet, but the two don’t always coincide. Remember the period after 2009. We spent years talking about a “jobless recovery.” The economy was growing, albeit slowly, without the kind of job growth you would normally expect.