Why unemployment will likely rise whether or not there's a recession
Signs are mounting that the hottest job market in a generation is starting to cool off. With the crypto bubble popping, technology companies pulling back on hiring and consumers increasingly skittish about spending, economists believe that the historically low unemployment rate is likely to go up — recession or no recession.
The Federal Reserve made that much clear last week when it hiked interest rates by 0.75% — a move designed to tame inflation as well as loosen the job market, which the Fed sees as tilted to an unhealthy degree in favor of workers.
While a rise in unemployment doesn't necessarily mean a recession, it does signal that the job market is shifting. Here are the biggest indicators that change is on the way.
It's part of the Fed's plan
Federal Reserve Chairman Jerome Powell has cautioned that a sharp rise in unemployment may be coming as the Fed hikes its interest rates at the fastest pace in 25 years. Speaking at a central bankers' forum in Sintra, Portugal, on Tuesday, Powell said there was "no guarantee" the Fed could raise rates just enough to slow inflation without causing a recession.
"We believe we can do that. That is our aim," he said, but added, "It's gotten harder. The pathways have gotten narrower."
Last week, the Fed revealed that its renewed focus on taming inflation at all costs would likely push up unemployment. After previously predicting that unemployment would fall to 3.5% this year and next, the Fed now expects the rate to rise to 3.9% next year, and to 4.1% the year after that. The Fed also updated its policy statement to remove a previous prediction that the labor market would "remain strong."
"It is notable that they are now forecasting a significant rise in unemployment by 2024 and that they dropped the reference to expecting the 'labor market to remain strong' in the statement," Brian Coulton, chief economist at the Fitch Group, noted at the time.
In the Fed's view, a 4.1% unemployment rate would still be low by historical standards, Powell emphasized at a press conference after the hike.
"We don't seek to put people out of work, of course, we never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labor market we want without price stability," he told reporters.
"We hadn't seen unemployment rates below 4% until a couple years ago; we'd seen it for like one year in the last 50," Powell said. "A 4.1% unemployment rate with inflation well on its way to 2% — I think that would be a successful outcome."
Layoffs, hiring freezes in some sectors
Already, the job market has cooled from its breakneck pace earlier this year, going from 700,000 new private-sector jobs created in February to just 330,000 added last month. Economists expect June's hiring report to slow even further, showing about 250,000 jobs created, according to FactSet.
The three-month average for job creation has now fallen to where it was in February 2021, according to Wells Fargo analysts.
Some sectors of the economy are reacting even more harshly — tech in particular. The technology-heavy Nasdaq composite has shed one-third of its value this year, while more speculative assets like cryptocurrency have evaporated.
Layoffs have followed, with tens of thousands of workers in the tech sector getting the ax in recent months, and even established companies freezing hiring and rescinding job offers. About 30,000 tech workers have been cut in May and June, according to the tracking site Layoffs.fyi. That includes the fast-growing startup Coinbase, which slashed 1,100 jobs earlier this month, as well as more established companies like Netflix, Compass, Redfin and Sprinklr.
Tech is one of several industries that is particularly sensitive to rising interest rates, and where hiring is expected to slow, noted Joe Brusuelas, chief economist at the accountancy firm RSM. There has been "an observable slowing of hiring in the rate-sensitive areas of manufacturing, trade and transport, and goods-producing industries, as well as in finance," Brusuelas said in a blog post.
Small businesses, which are responsible for most U.S. jobs, are likewise scaling back hiring plans. While small companies continue to report trouble hiring workers they deem qualified, the portion of businesses saying they plan to increase headcounts has dropped from record highs in 2021, according to the National Federation of Independent Businesses.
Retail showing signs of trouble
Measures of workforce activity in retail — another sector that is sensitive to the consumer-spending slowdown — back up the idea of a slowing labor market.
Workforce activity in the sector has been dropping in March, April and May, before reversing in June, according to Dave Gilbertson, vice president at UKG. So far, the drops have been largely from workers putting in less overtime. "If we see slight declines in workforce activity over the coming months, that's an indication that we'll see a very gradual rise in unemployment," he said.
"If we see any big jump, positive or negative, that could disrupt what the Fed is likely to do," he said.
So far, weakness in tech and retail hasn't translated into broader layoffs. Initial applications for jobless aid have risen since mid-March, but continued claims remain near a record low — a sign that people who lose jobs can, for now, find new ones fairly easily.
If continued claims were to rise by 10% — an increase of about 150,000 — that would augur a recession in the next two months, according to research from Deutsche Bank, which analyzed unemployment claims going back to the 1960s.
"[S]o although we're not trending there at the moment, it wouldn't take too much to change the picture," researchers said.
