Unemployment Rate Rises: Are We in a Recession?
Introduction:
The jobs report released by the Bureau of Labor Statistics (BLS) has become a fascinating statistical release in recent years. The data can be likened to a shell game at a county fair, where the bean (representing key labor market indicators) moves around so quickly that it’s hard to track. However, recent revisions, along with various factors like the unemployed, underemployed, overemployed, labor dropouts, and displacement of native-born workers, have raised concerns about the accuracy and reliability of the data. The discrepancy between household and payroll surveys suggests double-counting and statistical anomalies, which have been a cause for suspicion for years. Despite this, the unemployment rate has remained low, preventing the declaration of a recession. However, recent trends indicate a change in this scenario.
The Rising Unemployment Rate:
The most significant development in the latest jobs report is the increase in the unemployment rate, which now stands at 4.3 percent. Although this figure may not be high compared to modern standards, it is significant when viewed in the context of the 1950s and 1960s. What’s more important is the trend line, which shows a consistent rise in the unemployment rate.
A Sahm Recession:
Based on economist Claudia Sahm’s rule, when the three-month moving average of the unemployment rate rises by 0.50 percentage points or more relative to its low over the previous 12 months, it indicates the economy is entering a recession. By this measure, we can confidently say that we are currently experiencing a Sahm recession. While not a perfect predictor, this trend is an ominous sign of trouble on the horizon.
Revelations from the Latest Report:
E.J. Antoni, a trusted source for analyzing jobs data, has provided some striking insights from the latest report. First, despite the rise in nonfarm payrolls, the employment level has remained flat over the past year. This has resulted in a significant gap of about 7.3 million jobs below the pre-pandemic trend, with the situation worsening each month. Additionally, the employment-to-population ratio has been declining since November 2023, falling below levels seen in March 2022 and early 2017. This lack of progress over the past seven years is concerning. Furthermore, native-born American employment is not only below its pre-pandemic trend but also 208k below its pre-pandemic level, while foreign-born employment has increased by 3.9 million over the past five years. This disparity highlights the struggles faced by native-born workers in the labor market.
The Divergence between Households and Payrolls:
One of the key issues in the labor market data is the significant divergence between household and payroll surveys. This divergence has been worsening, indicating a lack of consistency and accuracy in the data. The increasing gap between these two indicators raises further doubts about the overall health of the labor market.
Inflation Adjustments and the Real GDP:
In addition to concerns about the labor market, there is growing evidence that the official Consumer Price Index (CPI) may not accurately reflect true inflation. A quantitative analyst at a healthcare firm used AI to make adjustments to the CPI, replacing “Owner Equivalent Rent” with median house prices and adding interest rates that are usually excluded. These adjustments resulted in a 127 percent inflation rate over four years. Further adjustments, including factors like health insurance, homeowner’s insurance, cars without hedonic adjustments, shrinkflation, fees, and airline prices, could potentially drive the inflation rate to 150 to 200 percent over the same period. Considering the GDP growth rate has been minimal, this suggests that the economy has been in a recession for the past four years, and the situation may be worsening.
The Fed’s Dilemma:
As the recession continues to unfold, the Federal Reserve faces a significant challenge. Lowering interest rates to combat the economic downturn could potentially reignite inflation, creating a difficult balancing act for the central bank. Ultimately, the Fed may need to make tough decisions to address this issue, potentially signaling the end of the first wave of the recession and the beginning of the second wave.
Conclusion:
The latest jobs report reveals concerning trends in the labor market. The rising unemployment rate, along with discrepancies in various labor market indicators, suggests a struggling economy. Additionally, adjustments made to the official CPI indicate significantly higher inflation rates than initially reported. These findings indicate that the recession has been ongoing for the past four years, and the situation may be deteriorating further. The Federal Reserve now faces the challenge of addressing this recession while considering the potential consequences of lowering interest rates. As the economy continues to evolve, it is crucial to closely monitor these indicators to gain a comprehensive understanding of the true state of the labor market and the overall economy.
