Strong Job Market, Low Recession Risk?

Chart of the Week: Strong Job Market, Low Recession Risk?

Several Fridays ago, market watchers were surprised by data that showed continued strength in the labor market. 

In January, the number of new jobs almost doubled month over month, as the economy gained 517,000 jobs. This crushed market and economists’ predictions. Unemployment fell to 3.4%—the lowest in 53 years. How could recession be coming given job market strength? 

Well, as the chart below shows, eight of the nine recessions since 1959 began with unemployment at or near its lowest point in the economic cycle.

This makes sense. It’s at times like these that the Federal Reserve begins to apply the brakes by raising interest rates. That’s particularly true today, as the pandemic led to historic stimulative measures and ultralow interest rates, resulting in inflation.

Now the Fed has embarked on one of the fastest rate-hike campaigns in its history in an attempt to slow inflation. The economy has withstood these rate hikes better than many economists predicted.

Jobs tend to be the last part of the economy impacted by higher rates. If history is any guide, we may start to see some weakness emerging in the labor market this year. Recession coming after a strong job market? Stay tuned.

Strong job market recession risk
Note: Chart shows headline unemployment rate along with periods of recession from December 1959 through January 2023. Sources: Federal Reserve Bank of St. Louis, National Bureau of Economic Research.

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