Job Market Is Strong, but It Means Recession Next Year Could Hurt More

  • The US added more payrolls than expected in November, marking another month of strong growth.
  • That expansion, along with even higher wages, is good news for the workers still switching jobs.
  • That red-hot labor market might mean more economic woes later on as the Federal Reserve steps in.

Hiring continues to boom in America. But a hot labor market could encourage the Fed to keep ramping up its war on inflation, and could make a recession next year worse than anticipated.

According to the latest data release from the Bureau of Labor Statistics, in November, the country added 263,000 payrolls. That’s above the 200,000 payroll economists that Bloomberg surveyed predicted — and means one more month than anticipated of more-robust hiring.

While overall job creation in November was lower than October’s revised gain of 284,000, growth was positive for most major industries in November.

November’s increase is good news for workers, who also got another raise that month. Wage growth remained strong in November, with average hourly earnings rising 5.1% year-over-year — above the 4.6% that economists Bloomberg surveyed predicted. Earnings also rose 0.6% alone in November, far from a slowdown.

“Overall, the job market is still hot. Despite headlines of layoffs and hiring freezes, employers are still adding workers,” Daniel Zhao, the lead economist at Glassdoor, told Insider. “Ultimately, that’s a positive sign for people who are still trying to find the job that is the right fit for them.”

“Big picture here is that the labor market still has a lot of resilience,” Nick Bunker, the economic-research director at Indeed Hiring Lab, told Insider.

Based on the robust recent growth in earnings and employers adding jobs at a “really rapid rate,” Bunker said that “both jobs and wages have far more momentum than previously thought.” Bunker also noted that workers still have bargaining power.

But while all that data spells good news for workers, it might have more dire consequences for the rest of the economy.

Bunker said the US labor market is “slowing down a little bit,” however it has “far more momentum than the Federal Reserve would like.” The Federal Reserve has been trying to pour cold water on a red-hot labor market by hiking interest rates: Four consecutive times now, the central bank has raised interest rates by 0.75%, which is the most aggressive measure it has taken so far to combat inflation.

The extreme hikes have sparked concerns from some Democratic lawmakers who argue that the tactic could push the economy into a recession and trigger a stream of job losses, but as the latest jobs data shows, the labor market is continuing to shine bright.

Still, while Jerome Powell, the chair of the Federal Reserve, signaled that rate increases could slow in December, he noted in a Wednesday speech that “the path ahead for inflation remains highly uncertain,” and interest rates will likely need to stay high for some time.

“It is likely that restoring price stability will require holding policy at a restrictive level for some time,” Powell said. “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.”

With the thriving labor market, Bunker said “the risk of an imminent recession is relatively low.”

But, Bunker said, there’s still a risk that the continuously strong labor market could prompt the Federal Reserve to become more hawkish and continue to hike rates aggressively — potentially tipping the economy into a recession.

“In the short term,” the current labor market is “good news,” he said.

“For maybe the latter half of next year, it might not be good news depending on how the Federal Reserve interprets this,” he added.

There could still be a recession brewing

Interest rates getting ever higher could spell the dreaded term that’s been looming over the economy for the last few months: recession.

Bank of America economists predicted this week that the US will enter a severe economic downturn in the first quarter of 2023, with growth set to fall by 0.4%. Economists at Deutsche Bank also see a dire outlook for the stock market, with major US stock indexes expected to plunge 25% when a potential recession hits.

But most predictions for a recession next year have been that it will be shallow and mild, which Brian Moynihan, the CEO of Bank of America, recently suggested to CNN.

While the job market is still hot, it’s not growing at the same breakneck speed as it was last year. Job openings — while high — are slowly cooling, something that the Fed had been particularly concerned about.

“I don’t think this report changes the Fed’s view of where the labor market is today,” Zhao said. “Yes, we did see wage growth tick up a little bit, but I viewed the increase in wage growth as more of a speed bump on the Fed’s path towards the soft landing.”

Amid concerns of a recession, though, both Powell and Treasury Secretary Janet Yellen think achieving a soft landing, in which the Fed combats inflation while avoiding a recession, is possible — but the path to do so continues to narrow.

“If you look over the course of this year, nobody expected us to raise rates this much, no one expected inflation to be this strong and this persistent and to have spread so broadly through the economy,” Powell said during his Wednesday remarks.

“And so to the extent we need to keep rates higher or keep them higher for longer, that’s going to narrow the path to a soft landing,” he said. “On the other hand, if we get good inflation data… if all those things start to swing the other way, then we could very much achieve this.”

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