The labor market remains strong, with payrolls soaring 372,000 in July and unemployment sticking at a measly 3.6%.
And though job openings fell 5.4% in June from May, to 10.7 million, that number surpassed the hiring total of 6.4 million by more than half.
Now the question is whether the Federal Reserve’s interest-rate increases will do much damage to the jobs picture. The Fed has raised rates 225 basis points (2.25 percentage points) since March and has made clear that more hikes are coming.
They see the rate climbing only to 4.2% in the fourth quarter of next year. That’s low compared with past recessions. The hire-hire-hire mindset of the early pandemic period won’t quickly shift to fire-fire-fire, economists say.
“I do think there’s a potential for labor hoarding,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, told Bloomberg. That “could mean that we don’t see the effects in the labor market take place for a longer period of time.”
Fed Chairman Jerome Powell apparently agrees. “The labor market can adjust because of the huge overhang of job openings, of excess demand, really,” he said in his news conference after the central bank’s July 27 meeting.
“There should be … perhaps lower-than-expected increases in unemployment…. This time could be different.”
That could mean the economy escapes recession. To be sure, it contracted 0.9% in the second quarter, after shrinking 1.6% in the first.
But financial markets indicate that the chances of recession are falling, according to JPMorgan.
The stock and credit markets together now imply a 40% probability of a U.S. recession, down from 50% in June, the bank’s strategists wrote in a commentary. Stocks and bond prices, of course, rose in July.
Those numbers compared with an increase of economists’ predictions to 40% from 30%, according to Bloomberg.
As for stocks, “the equity market was well ahead of the curve in terms of pricing in recession risk in June and has now converged with other markets such as credit and rate markets,” JPMorgan strategists said.
The S&P 500 points to a 51% probability of recession, down from 91% in June. The same measure for credit markets stayed in a range of 30% to 40%.
To be sure, for five-year Treasury securities, the probability rose to 38% from 15%, and for commodities it ascended to 84% from 65% in June.