4 changes in the economy to watch if you’re worried about a recession

The economy is in turmoil right now. Many economists predict that the United States will fall into a recession next year. Inflation remains stubbornly high, and the Federal Reserve continues to aggressively raise interest rates. But the labor market is holding up: Employers are struggling to fill open positions and the unemployment rate remains low.

A jobs report released on Friday showed that, despite the gloomy outlook, the labor market is still moving and remains a bright spot in the economy.

Employers added 223,000 jobs to the economy in December, according to a report by the Bureau of Labor Statistics. That was a slowdown from the month before, when employers added 256,000 jobs, but more than economists had expected.

These are typically months for the effects of Fed rate hikes to be fully reflected in economic data. By making borrowing more expensive, the Fed is trying to dampen demand and get consumers to spend less. That could help moderate inflation over time, but that could also result in businesses cutting back on hiring or laying off workers.

So far – despite fears and predictions of an economic downturn – the data on the labor market does not suggest that the United States is on the brink of a recession. Here’s a guide to some key numbers that economists watch closely.

1) Work progress

Although job growth is slowing and November earnings have been revised downward, employers are still adding a solid number of jobs to the economy each month (in 2021, the gains of work is stronger because the economy should recover after unemployment earlier during the pandemic. ). It will start to turn into trouble if the economy starts to see months of continuous job losses, economists say.

Because job openings are still high and there aren’t enough workers to fill them, Fed officials said they believe job growth has room to bounce back without the country that has seen a huge spike in unemployment. Employers can leave positions unfilled, for example, rather than lay off workers. The Fed is deliberately trying to weaken the labor market, in part to ease pressure on wage growth, which will help lower inflation.

Mark Zandi, chief economist at Moody’s Analytics, said the Fed would likely be “very happy with” monthly job gains slowing to any number between 100,000 and zero.

“At that rate of job growth, you’ll see unemployment rising slowly, but not fast enough to cause a loss of faith in the economy and a withdrawal of consumers,” Zandi said.

Aaron Terrazas, Glassdoor’s chief economist, said months of job losses could be a scary sign of pain ahead for workers. He noted, however, that the economy is still “quite far” from a recession due to the strength of the labor market, and it is possible that the United States can avoid one.

“It’s something you can worry about,” Terrazas said.

2) The unemployment rate

Many economists cite the “Sahm ​​rule,” which measures when the unemployment rate has risen sharply, as a benchmark for when the economy is falling into recession. According to the rule, developed by former Fed economist Claudia Sahm, a recession is triggered once the three-month average of the unemployment rate rises half a percentage point above its low in the past 12 months.

That didn’t happen. The unemployment rate remained low and fell to 3.5 percent in December, according to Friday’s report. That’s down from 3.6 percent the month before and a half-century low.

However, a higher unemployment rate can be encouraged by various factors, such as more workers coming off the sidelines and starting to look for jobs. Nick Bunker, the director of economic research for North America at Indeed Hiring Lab, said the underlying data helps determine how and why the unemployment rate is increasing. For example, it is important to examine data on the number of workers who went from being unemployed to having a job in the next month, which can be used to calculate the rate at which unemployed workers are looking for jobs, as he.

“If that number keeps going down and down, that’s a sign that unemployed workers are having a hard time finding work, which is a negative sign for the labor market,” Bunker said.

3) Unemployment claims

Unemployment claims can be one of the main indicators of an economy. Economists monitor claims as a proxy for layoffs, as the data is released weekly and is more timely than other monthly government reports.

Jobless claims would normally average around 250,000 a week in a more normal economy with a well-balanced labor market, said Zandi of Moody’s Analytics. If jobless claims rose by nearly 300,000 per week, that would be consistent with a recession, he said.

Jobless claims fell to 204,000 in the week ended Dec. 31, down 19,000 from the previous week, according to Labor Department data. Jobless claims remain low in 2022 compared to historical levels, underscoring the tightness of the labor market: The number of claims last year rose by 261,000 in the week ending in July 16.

4) Layoffs, job openings, and the quit rate

Data on layoffs, job openings, and how many workers quit their jobs also help economists learn more about the strength of the labor market and release a monthly BLS report.

Layoffs remained below 1.4 million in November (in comparison, layoffs were around 2 million in February 2020, before the pandemic spike). The number of people quitting their jobs remains higher than normal. In November, 4.2 million people quit their jobs and the quit rate stood at 2.7 percent, according to the latest report. Job openings remained high at 10.5 million in the same month.

Indeed’s Bunker said the quit rate is an important indicator to watch because it highlights how confident workers are in their ability to leave their current job and find a new one. Private sector layoffs are about 16 percent higher than the average in 2019, Bunker said.

“It’s hard to see an impending recession if people are still voluntarily leaving their old jobs at high prices,” Bunker said.

Monthly data can bounce around, though, and Bunker said he wants to see changes over several months before he worries about a recession.

“You have to see a long period of gradual deterioration or a big sharp change for any of the labor market indicators to trip the alarm bells,” he said. Bunker.