Is the Economy in Recession? Not Judging By the Labor Market.

A recession may arrive in much the same way—eventually. Recently, investors’  focus has shifted to the uptick in initial unemployment claims, prompting some to speculate that this must indicate we are in a recession or entering one. This concern is understandable given that the four-week moving average of initial claims has jumped 30% over the last nine months, from 190,500 on Sept. 24, to 246,800 on June 10.  

Those are startling figures, but they don’t necessarily mean a recession is imminent. To evaluate the current initial claims data accurately, it is essential to consider historical context and adjust the data for changes in the labor force. The labor force has grown significantly over the years, from 81.6 million in 1969 to 166.8 million today. A straightforward comparison of initial claims data between the two periods wouldn’t be meaningful. The data must be adjusted using a computed labor force ratio. 

That ratio is computed by dividing the size of the current labor force by the labor force in each prior period. When applying this ratio to the initial claims data from 1969 to the latest period, we find that the 1969 data should be multiplied by a factor of 2.0. This adjustment allows for a fair comparison of initial claims data across different periods. The labor force ratio—our adjustment factor—declines over time as the labor force has grown and is set equal to one in the latest period.  

The latest four-week moving average of initial claims stands at 246,600. Although that’s considerably higher than its level nine months ago, it’s well below levels observed during prior recessions after adjusting the data for U.S. labor force growth.    

It’s also useful to look at similar computations using the four-week moving average of initial claims during the first month the U.S. entered a recession dating back to the start of the initial claims data series in 1969. This exercise further reinforces the notion that the current labor market conditions do not align with those typically observed during recessionary periods.

The strength of the labor market is essential in assessing the likelihood of a recession. But while the uptick in initial claims may suggest the economy is slowing, it has not reached the critical threshold needed to signal that the U.S. economy is either in a recession or about to enter one. Properly adjusted data shows the labor market remains resilient and shows no signs of a protracted economic contraction. The relatively low readings of initial claims compared to their historical benchmarks indicate a healthy labor market.

But when it comes to recession forecasts, like in the case of Billy Joel’s journey, the bus usually arrives at its destination sooner or later. That’s important to understand in the context of slowing inflation. The U.S. producer price index dropped from a peak of 11.7% in March 2022 to its latest reading of 1.1% in May 2023, and the U.S. consumer price index dropped from 9.1% in June 2022 to 4% in May 2023. It should be comforting that the Federal Reserve has chosen to maintain its 2% inflation target without insisting on achieving this goal over the short run. This will allow the U.S. economy to continue progressing on the inflation front without generating an excessive tightening of financial conditions. The result should be only a mild recession in early 2024 under the worst circumstances. 

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