4 changes in the economy to watch if you’re worried about a recession

The economy is confused now. Many economists predict the United States will enter a recession next year. Inflation remains very high, and the Federal Reserve continues to aggressively raise interest rates. But the labor market is steady: Employers are struggling to fill open positions and the unemployment rate remains low.

The jobs report released on Friday showed that, despite the gloomy outlook, the labor market continued to improve and remained a bright spot in the economy.

Employers added 223,000 jobs to the economy in December, according to a report by the Bureau of Labor Statistics. That was a slowdown from the previous month, when employers added 256,000 jobs, but more than economists had expected.

It usually takes months for the effects of Fed rate hikes to fully show up in economic data. By making debt more expensive, the Fed is trying to reduce demand and get consumers to spend less. This should help reduce inflation over time, but may also cause businesses to cut back on hiring or lay off employees.

So far – despite fears and predictions of an economic downturn – labor market data do not indicate that the United States is on the brink of recession. Here’s a guide to some key numbers to watch closely.

1) job growth

Although job growth has slowed and November profits were revised downward, employers are still adding strong numbers of workers to the economy every month (in 2021, employment results are strong as the economy recovers from the pre-pandemic spike in unemployment. ). It will start to get troubling if the economy starts to see months of steady job losses, economists say.

Because job vacancies are still high and there aren’t enough workers to fill them, Fed officials said they believe job growth has room to bounce back without the country seeing a rise in unemployment. Employers can leave positions unfilled, for example, rather than lay off employees. The Fed is deliberately trying to weaken the labor market, in part to reduce pressure on wage growth, which should help reduce inflation.

Mark Zandi, chief economist at Moody’s Analytics, said the Fed would be “pretty happy with” monthly job growth shrinking to a number between 100,000 and zero.

“In the job growth rate, you will see unemployment slowly moving higher, but not fast enough to precipitate a loss of faith in the economy and a pullback by consumers,” Zandi said.

Aaron Terrazas, chief economist at Glassdoor, said a few months of net job losses would be a sign of the pain to come for workers. However, he noted that the economy is still “quite a long way” from recession due to the strength of the labor market, and that the United States may be able to avoid it.

“That’s definitely something you can worry about,” Terrazas said.

2) Unemployment rate

Many economists refer to the “Sahm ​​rule,” which measures whether the unemployment rate has increased, as a benchmark for whether an economy is in recession. According to the rules, created by former Fed economist Claudia Sahm, a recession is triggered if the average three-month unemployment rate rises half a percentage point above less than 12 months ago.

That hasn’t happened yet. The unemployment rate remained low and fell to 3.5 percent in December, according to Friday’s report. That’s down from 3.6 percent the previous month and a half-century low.

Still, the higher unemployment rate can be driven by various factors, such as more workers leaving and starting to look for work. Nick Bunker, director of economic research for North America at Indeed Hiring Lab, said the underlying data will help determine how and why the unemployment rate is increasing. For example, it is important to check the data on the number of unemployed workers who become employed in the next month, which can be used to calculate the rate of unemployed workers looking for work, he said.

“If those numbers keep going down and down, that’s going to be a sign that the unemployed are having a hard time finding work, which is a negative sign for the labor market,” Bunker said.

3) Unemployment claims

Unemployment claims can be one of the first signs of a recession. Economists monitor the claims as a proxy for layoffs, as the data is released weekly and is more timely than other monthly government reports.

Jobless claims would normally average about 250,000 a week in a more normal economy with a balanced labor market, said Zandi at Moody’s Analytics. If jobless claims rise by nearly 300,000 per week, that would be consistent with a recession, he said.

Jobless claims fell to 204,000 in the week ended Dec. 31, down 19,000 from the previous week, according to Labor Department data. Jobless claims remain low in 2022 compared to historical levels, which underlines the tightness of the labor market: The number of claims last year reached 261,000 in the week ending July 16.

4) Layoffs, job vacancies, and quit rates

Data on layoffs, job openings, and the number of workers out of a job also help economists learn more about the strength of the labor market and are released in monthly BLS reports.

Layoffs remained low at 1.4 million in November (for comparison, layoffs were nearly 2 million in February 2020, before the pandemic spike). The number of people quitting their jobs also remains higher than normal. In November, 4.2 million people quit their jobs and the quit rate was 2.7 percent, according to the latest report. Job vacancies remained high at 10.5 million in the same month.

Bunker at Indeed said the rate of quits is an important indicator to watch because it emphasizes how confident workers are in their ability to leave their current job and find a new one. Terminations in the private sector are still about 16 percent higher than the 2019 average, Bunker said.

“It’s hard to see the recession close if people still voluntarily leave their old jobs at high rates,” Bunker said.

However, monthly data can bounce around, and Bunker said he wants to see changes over the next several months before he becomes more concerned about a recession.

“You will have to see the duration of the period of gradual deterioration or a large clear reversal for any of the indicators in the labor market to trip the alarm bells,” said Bunker.