The U.S. job market is still hot, and the economy is headed for recession: Both scenarios could be true. Nonfarm payrolls growth in May again stunned Wall Street, rising by 339,000, well above Wall Street’s estimate that the report has been underperforming since January 2022. Investors reveled in the aftermath of the report on Friday as expectations grew that the jobs picture would be strong but not so much that the Fed would need to raise interest rates again. However, there is an old saying on Wall Street that when it comes to recessions, the job market is always the last to know. A recession later this year or early 2024 is still in play, with a slew of Fed tightening already in the works and seeping through the economy. “Today’s gain in employment is no guarantee of tomorrow’s gain, and policy changes have had no impact on the labor market for months,” Ian Shepherdson, chief economist at Pantheon Macroeconomics, said in a note to clients on Monday. Fed officials often Citing the “long and variable lag” that monetary policy action has. This is an important consideration as the central bank has raised interest rates by 5 percentage points since March 2022. Such moves are not thought to have a real impact for 12 to 18 months or more. “That’s why we’re alarmed when analysts, commentators and Fed officials cite recent data as justification for further rate hikes,” Sheppardson added. “The policy lag is long and real, and employment numbers in any given month, even for several months, are not a reliable indicator of labor market conditions over the same period, let alone in the future.” Signs of Trouble Also, the jobs report was mixed Satisfactory. In addition to the impressive headline payrolls, the household survey surprisingly fell by 310,000, which pushed the unemployment rate up by 0.3 percentage points to 3.7%. The total number of people considered unemployed also rose by 440,000. Although the household survey has historically been more volatile than the business statistics, it still shows potential holes. “You have contradictory signs. You have employment numbers showing massive job creation but household surveys showing equally massive job losses,” said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. Things.” Sri-Kumar expects a “deep but short” recession later this year, which will push the Fed back to easing after its fastest pace of rate hikes in more than 40 years. Fed tightening is just one of the factors expected to lead to a slowdown and potential contraction in the economy. Central bank policymakers are specifically targeting a slowing labor market to bring inflation down. But the rate hike is also expected to hit credit and lending conditions, both of which are also likely to be affected by regional banking problems this year. Both services and manufacturing have been hit. While employment continues to climb, labor productivity has been low. A staggering 2.1% drop in productivity in the first quarter coincided with a 4.2% rise in unit labor costs, putting double pressure on a faltering economy. Negative numbers on productivity are usually associated with recessions. Another reminder of the dark clouds on Monday came after the ISM services index recorded a disappointing 50.3, just above the 50 level that represents expansion in the sector. The sub-indices showed a uglier reading than the headlines, with sharp declines in backlog of orders, new orders and employment pointing to weakness. With roughly twice as much spending on services than on goods in the $25.5 trillion U.S. economy, the current numbers are worrisome. “Contrary to last month’s strong job growth, the ISM services index fell to a five-month low of 50.3 in May from 51.9, suggesting the economy is headed for a recession,” U.S. Deputy Chief Executive Andrew Hunt wrote. Capital Economics Economist. The weak services data was accompanied by the ISM manufacturing reading – most recently at 46.9 – contracting for the seventh straight month. Taken together, the two numbers point to a 1% annualized decline in GDP growth, Hunter said. Combined with a recent surge in the trade deficit due to lagging exports, lower business investment and lower consumption, economic growth is likely to “be barely above zero in the second quarter,” he added. It is not uncommon for job growth to slip into a recession. For almost all recessions since World War II, employment has never been a leading indicator until the recession actually happened and turned negative. To be sure, though, the current level of strength is unusual for a recession. DataTrek Research noted that the 0.3% increase in employment as a percentage of the labor force was in line with expansion rather than contraction, giving investors hope that the economy at least won’t face major trouble anytime soon. “Friday’s report of 339,000 jobs added in May delayed the start of any future U.S. recession,” wrote DataTrek co-founder Nicholas Colas. In the 6-12 months since the announcement, the contraction has not started.” The Atlanta Fed’s GDPNow data tracker showed growth of 2% in the second quarter. However, the instrument was volatile during the quarter, as low as 1.7 percent and as high as 2.9 percent.
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