Matt’s Chart of the Week
Recession Without Unemployment Increase…Dream or Reality?
As some readers may recall, we previously highlighted the Sahm Rule, coined by a former Federal Reserve (the “Fed”) economist Claudia Sahm. The rule states that an indication of the beginning of a recession is when the unemployment rate rises by more than .5% from its low over the prior 12-month period. Recently, this has not been a concern since we continue to see strong job growth and an extraordinarily low unemployment rate. In fact, the Fed surprised many when they began raising rates this past March by indicating that the Fed believed it was possible that they could bring down inflation through rate hikes without significantly increasing unemployment. On the one hand, this would seem unlikely. The Fed’s mandate from Congress is balancing maximum employment in the economy with stable prices. These two goals are generally seen as a trade-off i.e. the tighter the labor market, the more likely wages rise (as do other prices as a function of that) somewhat more than the 2% inflation target. On the other hand, so far, the rate hikes this year have not impacted employment. We found the below chart an interesting counterpoint to the debate about how much can the Fed slow inflation without causing a significant recession and rising unemployment. The chart compares the trajectory of two items (real wage rates and employment) in two timeframes (the 2008 recession and the 2022 recession). In 2008, U.S. employment went down as real wages i.e. wages adjusted for the going inflation rate went down. This makes sense. As the cost of each employee went up for the employer, the employer had to make tough choices and to lay off some employees in order to keep costs down during the recession. However, in the current economic slowdown, we see real wages not keeping pace with the going annual inflation rate. As a result, employers, when they can, are choosing to keep employees on and, in many cases, hire more to fill open positions still vacant from the pandemic. In fact, recent news stories have pointed to the possibility that companies are or will hoard jobs due to concerns that these companies would be otherwise unable to hire when the need arises. All in all, while we would expect unemployment to rise somewhat as the Fed continues to raise rates, it would seem from the below and the psychological impact of the current labor shortage, as evidenced by “labor hoarding” that the impact on unemployment will likely be less than we would normally expect.
https://www.axios.com/2022/08/04/hoarding-workers-labor-market
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