The Federal Reserve chair, Jerome Powell, was correct on Wednesday when he said in a news conference that the unemployment rate is “just about as low as it’s been in 50 years.”
But that does not necessarily mean, as Powell also said, that “the American economy is very strong and well positioned to handle tighter monetary policy.”
While the low unemployment rate is great for workers, it doesn’t shield the US economy from the risk of a recession triggered by, say, the war in Ukraine or China’s Covid-19 lockdowns. Powell and other Fed officials need to keep those risks in mind as they raise interest rates to stamp out inflation.
The US economy added 428,000 nonfarm payroll jobs in April and the unemployment rate stayed at 3.6 percent, the Bureau of Labor Statistics said on Friday. “Job growth was widespread, led by gains in leisure and hospitality, in manufacturing and in transportation and warehousing,” the bureau reported.
Trouble is, that’s a rearview mirror look at the economy. If you wait until the jobless rate starts rising to try to rescue growth, you’re already too late. Typically the number of people on payrolls in the United States falters when the overall economy falters, not before. The payroll figure is categorized as a “coincident” rather than a “leading” indicator by the Conference Board, a business-supported research group.
What’s more, the current low unemployment rate overstates the strength of the labor market. One reason there are so many job openings — 1.9 vacancies for every unemployed person in March — is that many of the people who dropped out of the labor market when Covid-19 hit still haven’t come back. “The current level of employment is roughly 4.5 million jobs short of projections based on prepandemic dynamics,” Mauricio Ulate, a senior economist at the Federal Reserve Bank of San Francisco, wrote last month.
Amy Crews Cutts, who has an economic consulting firm in Reston, Va., that bears her name, told me she puts the chance of a recession in the coming 12 months at 70 percent. She said she understands that the Fed has to take inflation seriously. But she added, “I don’t see how jacking up interest rates is going to solve the fundamental problem,” which she said is mostly tightness of supply of critical materials, such as oil and computer chips.
“The idea that the Fed can micromanage inflation is a tough one,” said Cutts, who also serves as the chief economist of the National Association of Credit Management. “How do you stop a global supply problem?”
Rajeev Dhawan, the director of the Economic Forecasting Center at Georgia State University, said he worries that if Europe stops buying Russian oil to cut off funding for its war in Ukraine, global oil prices will shoot up and a recession in Europe will occur and spill over to the United States. He puts the probability of a US recession at 30 percent in the next six months and more than 60 percent in 12 months. “The way it’s going,” he said, “it’s not looking good.”
The economist David Rosenberg is even more pessimistic, arguing that a recession has already begun. (I featured him in this newsletter in March.) He points to, among other things, the government’s announcement that the US gross domestic product declined at an annual rate of 1.4 percent in the first three months of 2022.
Many economists, along with President Biden, dismissed the first-quarter G.D.P. decline as a brief anomaly. But Rosenberg, president of Rosenberg Research in Toronto, argues that the factors others dismissed as one-time events — the weakening of exports and a slowing of inventory accumulation — are here to stay. “For those economists saying we should ignore the trade sector, try selling the story to a company with a high export orientation and tell me how your black eye feels in the morning,” Rosenberg wrote on Monday.
Rosenberg has a litany of other reasons to worry about growth: The stock market has fallen; the strength of the dollar will hurt exports; inflation is eroding workers’ incomes, which will cause them to spend less; manufacturing and housing are under pressure; and consumer sentiment has weakened.
To be fair, Cutts, Dhawan and Rosenberg are more pessimistic than most economists. Ian Shepherdson, the chief economist of Pantheon Macroeconomics, argues that recessions begin either with balance sheet problems (too much debt) or cash-flow problems (people spending more than they’re earning). Neither is the case now, he said. He’s optimistic that this episode of Fed interest-rate tightening will be more like that of the mid-1990s, when the Fed raised interest rates to choke off inflation without causing a recession.
Higher interest rates will squeeze housing and manufacturing, but those sectors aren’t big enough to bring down the overall economy, Shepherdson argued. He said the preconditions for a recession aren’t present. “Things go to hell when something substantial happens,” he said. “They don’t randomly go to hell.”
Shepherdson could be right, but there are a lot of ways that the Fed’s inflation-fighting campaign could go wrong. Powell acknowledged as much in the news conference on Wednesday, when he said “there’s a path” to success — hardly a guarantee. He also put it this way: “I think we have a good chance to have a soft or softish landing or outcome, if you will.”
Softish would be goodish. In fact, it may be the best we can hope for.
The New York Times
