Today’s entry: Hey Brian help me out with this one. How can we be in a recession if job gains are still strong and unemployment is still low? I’ve never heard of a recession where we gained jobs. Has that ever happened before? Inflation is a huge problem obviously but nothing else seems to point in the direction of a recession. What am I missing here?
Bottom Line: It’s a good question and one that’s gaining a lot of additional addition on back of Friday’s monthly BLS Jobs report which showed 372,000 new jobs being added in June, a number ahead of expectations, and your point continues a theme of job gains during what appears to have been the 6th month of a recession. I’m going to answer one of your questions out of the gate. No, the US has never had a recession in which the economy has gained jobs during it. If that were to happen here it’d be a first. But then again couldn’t we say that about a lot of things over the past couple of years? I’m going to come back to that storyline. But let’s start here... With the whole recession thing and whether the reality meets the rhetoric. A textbook definition of a recession is at least two consecutive quarters of negative GDP growth. Here’s what we know, the US economy shrank by 1.6% in the first quarter of the year. That means unless the 2nd quarter which we recently wrapped up shows economic growth over last year, we’re in a recession. And guess what? Friday’s employment report had a big impact on the leading Federal Reserve economic gauge used to estimate economic growth.
A lot’s changed in a week with the closely watched Atlanta Fed GDP tracker called GDPNow. And it’s a good news/bad news kinda story. A week ago the tracker predicted the US economy contracted by 2.1% in the second quarter. That stunk twice. First, it seemed to confirm the US economy spent the whole first half of the year shrinking. Second, it meant the decline in the US economy had been getting worse as the year went along meaning things could still be getting worse right now. No bueno. So, here’s the good news. On back of Friday’s employment data, the Fed’s GDPNow tracker revised economic growth for the 2nd quarter considerably higher. The tool is now predicting that the US economy shrank by 1.2% last quarter. To the point of your question, the strong job gains had a profound impact on the overall economic outlook for the entire quarter. That takes us to the obvious bad news. If that number proves true, it would still mean we’ve spent 2022 stuck in a recession. But back to the better news for a moment. If the most recent GDPNow read proves accurate, the rate of the recession would have been improving throughout the quarter providing the opportunity for a shallow recession that we might be able to quickly recover from. These are lots of ifs though. The key date is near the end of the month – July 28th. That’s the day we get the first hard GDP estimate for the 2nd quarter. So, with all of the wonky economic nuts and bolts stuff out of the way let’s get back to the root of your question about whether it’s possible to gain jobs in a recession and what’s really going on.
When talking jobs, the first thing to know is that the US economy still hasn’t returned to prepandemic levels. Even with Friday’s report, the US economy still has 524,000 fewer people working in it than there were in February of 2020. So the first economic truth and reality is this. We’ve yet to have any, cero, zero – not a single job gained in the US economy yet. What’s happened up to now is still a jobs recovery from the draconian pandemic lockdown policies. In this regard, yes – it is possible to add jobs while the economy is in decline. If the economy stinks, but it stinks less than before, it's possible to add back some of the jobs lost and the severity of the impact of the decline lessens. So, this is a super important point. Let's be clear...the United States has been in a jobs recession for 27 months that’s yet to end yet. That’s what’s so different about this recession from any previous one. That includes the late 70’s early 80’s recession caused by Captain Peanut’s inflation which is most analogous to what we’re living through right now. In all previous recessions the US economy had record high employment at the time of a recession starting. That wasn’t the case this time around. But that’s not the only dynamic...
As I’ve stated several times this year, including just last week, the reason I suggested we were in a recession starting in January, which proved to be when negative economic growth kicked in, was due to a very simple principal. The cost of life rising much faster than our incomes. Friday’s employment report showed average wage growth was 5.1% year-over-year through June. As we know, the CPI, or Consumer Price Index has shown the average cost of life has risen 8.6% over that same time. This isn’t complicated. The average family is 3.5% worse off today than a year ago. And the last month the average family didn’t fall further behind to due to impact of inflation? Last September. That’s how I was able to successfully identify January as a problematic month - in January and why the odds are we’re still in a recession. Adding a few hundred thousand jobs a month can’t begin to account for the average household falling 3.5% further behind per month. Until wage growth outpaces the rate of inflation, the US economy can’t sustain economic growth. Consumer spending is 70% of the US economy. A lot of this stuff is complicated, but at its core, the situation we’re living in is as simple as that. The better news, as I mentioned in one of my takeaways last week, I believe inflation peaked in June – so that’s something.
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