The ‘Growth Recession’ Coming in 2023 Won’t Look or Feel Like the Past

  • The latest data on employment from the Bureau of Labor Statistics shows a strong labor market in the US.
  • That’s bad news and good news for the Federal Reserve, which is trying to cool the economy.
  • But the latest data also means that the coming recession could be colder than the last few.

A recession may be on the country’s horizon — but it probably won’t be as pronounced as most Americans expect.

and inflation continues to soar in the US, the Federal Reserve has moved aggressively to combat high prices by hiking interest rates. On Wednesday, the central bank raised rates by 0.75 percentage points fourth time in a row to do so on that scale – and it remains Fed Chair Jerome Powell’s message that the economy must suffer “some pain” to control inflation.

But on Friday, new data from the Bureau of Labor Statistics showed that the labor market continues to be strong. United States added 261,000 payrolls in October, higher than expected.

A strong labor market complicates matters for the Fed. While the focus is on bringing the price down for Americans, the challenge comes with how aggressive is too aggressive – hiking interest rates can slow down the economy, but also the risk of bringing on a recession.

Friday’s jobs report, however, may put that to rest because it suggests the economy is in a so-called growth recession, defined as a shallow contraction that still has a strong labor market. The latest data appears to be in line with the Fed’s ultimate goal of bringing about a gradual and manageable recession.

“I don’t think this changes the Fed’s view of the labor market.

The unemployment rate was still low in October but rose from 3.5% in September to 3.7%. And both the overall labor force participation rate and the prime-age rate, ages 25 to 54, fell in October.

Nick Bunker, director of economic research at Indeed Hiring Lab, told Insider that the labor market is still strong but there are “some signs of some moderation,” adding that the demand for workers seems to be easing.

Bunker said he hopes it shows the economy “maybe making a soft landing,” something the Fed has been angling for in its war against inflation.

“But there’s certainly a possibility that the landing will be harder and rougher than what we’re seeing now,” Bunker said.

Do not expect a big dramatic recession

If a recession occurs, it will be “much milder” compared to what was seen during the pandemic and the great financial crisis, David Kelly, global chief strategist at JPMorgan Asset Management, previously said. deep.

Kelly said that two recessions in particular “were not normal recessions” and became “mega recessions.”

But it’s still hard to know how big or serious the coming recession will be, especially as the Fed waits for more economic indicators.

“In the next year, the pace of hiring is likely to slow, given that many expect the unemployment rate to rise to the 4% level,” said Mark Hamrick, senior economic analyst at Bankrate.com, after Friday’s jobs report. . “It is in the context of a high probability of recession. But the severity or magnitude of such a contraction is difficult to predict.”

what is it calledrecession is growing“It could be on the horizon. Workers will see the unemployment rate rise as economic growth slows. If that sounds familiar, you may have seen traces of it in the latest BLS employment situation release: The unemployment rate ticked up slightly, although it still hovers near record lows.

“Reducing inflation likely requires a period of sustained growth below the trend and some softening of labor market conditions,” said Federal Reserve Chair Jay Powell in his November. press conference. “Restore price stability is important to set the stage to achieve maximum employment and stable prices in the long term.”

As the previous Insider reported,The Fed’s high interest rates will cause companies to slow down their hiring plans, and therefore lead to smaller salary gains for workers. Employees of course may be hit more than others in the next recession.

“Raising interest rates signals to working people that the government thinks we have too much money and we should have less money to spend,” Liz Shuler, president of the AFL-CIO, said in a statement after the Fed’s latest rate hike.

But while a growth recession won’t be pleasant for workers — interest rates will be high, wages may not be as high, and some jobs may be cut — it won’t be like the Great Recession or the chaos of 2020.

Kelly said that problem “Most young people in America, the only memory they have of the recession is those two recessions,”

But keep an eye on inflation

Inflation is sky high. Core inflation, which excludes volatile food and energy prices, was at a 40-year high in September. Attention will be in the next Consumer Price Index report from the Bureau of Labor Statistics on November 10.

Looking ahead, all eyes are on the Fed’s December meeting when it will announce its next round of interest rate hikes. Powell indicated Wednesday that the rate hikes may slow down “as soon as the next meeting or the one after that,” but he maintained that rates will still need to be increased as long as the high inflation rate persists.

“I don’t have the feeling that we have over-tightened or moved too quickly,” he said. “I think it’s a good and successful program that we have reached this quickly. Remember though, that we still think there is a need for continuous rate increases and we have some ground left here, and cover it we will. . “

If prices remain high, Powell and the Fed may take action and cover that ground more aggressively. That could mean a much more pleasant recession.

“We look at industry data carefully for which industries are the canaries in the coal mine for a bigger recession,” Zhao said. “I think the obvious sectors to watch are the more sensitive ones,” like construction, as the housing market cools.

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