Jobs report shows labor market at risk, recession possible

While a single data point is hardly a reason to completely change one’s tune, the report served as a wake-up call: danger is closer than many people thought. The cracks in the economic foundation are increasingly impossible to ignore. While we’re not in doomsday territory, the labor market has been weakening for some time, and it’s unclear what will reverse that trend. The report’s release just days after the Federal Reserve decided to hold interest rates steady rather than cut them in an attempt to restabilize the economy has also fueled fears that the central bank is behind the curve and that a recession could be on the horizon.

“There was a lot of data that was sort of in the green zone, and now there’s a lot more data that’s flashing yellow,” said Guy Berger, director of economic research at the Burning Glass Institute, a labor analytics firm.

This is a weaker labor market, and we have not yet seen any signs that it has finished weakening.

Beyond the July jobs report, there are plenty of signs that the labor market is cooling. The June Job Openings and Turnover Survey, also released last week, showed a slowdown in hiring, with the number of people starting new jobs returning to pre-pandemic levels in 2020. The pace at which people are leaving their jobs has also returned to pre-pandemic levels. The good news is that layoffs have remained low, but layoffs are typically a lagging indicator: Companies are more likely to slow down hiring new people before laying off current employees. Overall, the report made clear that the labor market is not as hot as it was just a few years ago.

“When hiring declines, it doesn’t always lead to a recession, but that’s usually the first reaction, and we’ve seen a steady decline in hiring,” said Skanda Amarnath, executive director of the advocacy group Employ America.

There are other signs of weakness, too: The Conference Board’s Employment Trends Index fell for the second straight month in July, typically a sign of a potential slowdown. The share of respondents who say it’s hard to get a job has increased, though it remains well below what it was in recent recessions. For those looking for a raise, there’s also some tough news: Wage growth is slowing. The Employment Costs Index showed that private-sector wages rose 3.4% in the second quarter, the slowest pace since September 2020.

The labor market has been in a slowdown in recent months. While the economy is still creating jobs steadily, it is doing so at a slower pace than during the post-pandemic recovery. Basically, if you like your job, or if you don’t like it, you should probably keep it. This is to be expected: Most economists believe that the pace at which we created jobs in 2021 and 2022 was unsustainable. The question that has been raised is what will normal look like, and what will keep normal from tipping into negative territory. Once the unemployment rate starts to rise, what will keep it from rising further instead of remaining stable?

One factor that has investors, economists and observers on edge is the Sahm Rule, a recession indicator named after former Fed economist Claudia Sahm. According to the rule, if the three-month moving average of the unemployment rate rises by 0.50 percentage points or more from its lowest level in the previous 12 months, we are in the early stages of a recession. If that sounds confusing, here’s the only thing you really need to know: The July jobs report triggered the Sahm Rule.

Sahm, who is now chief economist at New Century Advisors, told me that the country is not in a recession right now, and that there are reasons to think that his namesake regime is somewhat out of whack. The growing number of people entering the labor market, whether immigrants or people coming into the workforce from behind the scenes, could disrupt his regime. But that doesn’t mean we’re out of the woods.

“I think the Sahm rule exaggerates the current weakness, but there is momentum under the hood,” she said. “The labor market is weaker, and we have not yet seen any signs that it has finished weakening.”

Amarnath echoed this point, that there are reasons to think that this time things are different. The labor force participation rate of core-aged workers (ages 25 to 54) is near historical highs, and employment in recent years has been high and stable. It is worth remembering that the current unemployment rate is far from catastrophic. It is around, or even below, the level that many economists would consider full employment—or at least that is what they thought before the last two years suggested it was lower.

“By historical standards, we’re still in a situation of full employment,” said Ali Bustamante, director of the Worker Power and Economic Security program at the Roosevelt Institute, a progressive think tank. “I think one of the things that’s been characteristic of the labor market over the last couple of years is that it’s largely shaped our understanding of what full employment actually looks like.”

Bustamante added: “A few years ago, people would have seen an unemployment rate of 4.3%, and they wouldn’t have blinked, simply because they wouldn’t have associated that with a significant economic downturn.”

The Fed probably has some margin of error, but it is not infinite.

Despite encouraging historical comparisons, the message from the July jobs report is that labor market dynamics are heading in the wrong direction and the risk of things getting worse is very real.

“There is some evidence that we are probably in the middle of a slowdown in job growth, a slowdown in wage growth, a slowdown in all of these trends,” Amarnath said. “If this slowdown continues in the way that it’s happening, it will be a distinction without a difference. We will be in a recession anyway if it does.”

One way to reverse the labor market trend, experts say, is for the Fed to cut interest rates. While a 0.25 percentage point reduction in its key interest rate would represent only a minor adjustment to the overall cost to businesses, it would start to reduce borrowing costs for loans like mortgages and credit cards, while also encouraging businesses and consumers to keep spending. The Fed had a chance to cut rates in late July and didn’t, and unless it makes an emergency rate cut (which is unlikely), any action will likely wait until its next meeting in September. In his remarks after the July decision, Fed Chair Jay Powell sounded mostly calm about the labor market, though he said that, as always, the central bank would act if necessary. The “need to act” signal is now flashing.

“The situation is more volatile,” Berger said. “The Fed probably has some margin of error, but it doesn’t have an infinite margin of error.”

By September, we’ll have even more data, including the August jobs report. No one should lose sleep over the state of the job market or the economy in general. But the landscape has been more precarious than many people thought, and precarity is never a pleasant situation.

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Emily Stewart is a senior correspondent at Business Insider, where he writes about business and economics.