UNC economist: We’re not at risk of recession despite worries

CHAPEL HILL – The latest jobs figures show a strong economy, and the United States is not at risk of recession, according to Dr. Gerald Cohen, the chief economist at the Kenan Institute in Chapel Hill.

Dr. Cohen delivered a briefing on the economy, jobs and employment, and inflation earlier today, following the release of April 2022 data on the employment situation from the Bureau of Labor statistics.

“We had a healthy jobs report this morning,” said Cohen. “With 428,000 jobs created.”

The latest data on the employment situation from the Bureau of Labor Statistics shows that the US economy added 428,000 jobs in April 2022. But BLS also noted an adjustment in prior month job growth of a negative 39,000 jobs, Cohen said.

Gerald Cohen, the chief economist at the Kenan Institute. Image: Kenan Institute.

“But the report was stronger than expectations plus revisions,” said Cohen. “The jobs in the economy were, on net, 9,000 more than expectations plus revisions.”

“Markets should take that as a strong number,” Cohen said, though the unemployment rate remains unchanged at 3.6% despite expectations being a slight decrease in the unemployment rate to 3.5% nationally.

“Overall, the jobs report was quite strong,” said Cohen. But, even with the strong numbers in job growth in recent months, said Cohen “employment is still 1.2 million smaller than the pre-COVID peak.”

That leaves a gap in the labor market, said Cohen, which we’ve yet to make up. So, until the gap closes, Cohen said, we should expect to continue to see strong job growth numbers.

In perspective, in a normal economy, we might expect to see monthly job growth of about 100,000, Cohen noted. “The three month moving average is slowing a bit, but remains at a very strong pace,” he said.

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Wages, job sectors

According to the BLS data, 55,000 of the new jobs added to the US economy in April 2022 were in manufacturing.

“Job growth in the manufacturing sector was strong,” said Cohen.

But job growth wasn’t equal across sectors. In fact, said Cohen, there was a “meaningful deceleration in construction jobs” with only 2,000 sector jobs added in April compared to about 20,000 in previous months.

“In some respects, this is what the Fed wants,” said Cohen. “This slowdown in construction is positive news for the Fed, and I wouldn’t be surprised to see declines in the construction sector.” And while jobs are being added, with 11.5 million open jobs, the latest data is showing that wages are increasing, as well.

“Average hourly earnings for the month increased by 0.3% for the month and is up 5.5% year-on-year,” said Cohen. “That generally should be good news, however, inflation remains higher.”

The latest inflation figures, as tracked by the consumer price index, showed a year-over-year increase of 8.5%.

“Still, wages are growing much more slowly than inflation, so inflation-adjusted real wages is negative,” said Cohen. “Meaning people’s take home pay is less, relative.”

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Labor force participation

But the strong jobs growth numbers mask something that could be of potential concern in the economy, Cohen said.

“The unemployment rate masks some of the issues with labor force participation,” said Cohen. And, according to the latest data, US labor force participation slowed, again. Data released by the Bureau of Labor Statistics earlier this week also showed that 4.5 million people quit a job in March and 1.4 million people were laid off from their roles, while there were 11.5 million open jobs.

“People dropping out of the labor force is not good news,” said Cohen. “As the population is aging, you’re seeing people moving out of labor force participation.”

While some of this is demographic, in that workers who are aging have chosen to retire, noted Cohen, even among prime age workers, the labor force participation rate has slipped in recent months.

“Prime age participation rate, which is 25-40 year olds, who are most likely to work,” said Cohen. “Is not where we would like to be.”

And, in the current economy, it appears that women are disproportionately impacted when it comes to labor force participation.

“Women tend to be harder hit than men, and that is because of caregiving,” said Cohen. “One of the things that we suspect, though we don’t know.”

A recent analysis found that North Carolina ranks 36th best in the nation for working mothers. Like other places in the economy where prices are surging, rising childcare costs may change a family’s calculations and decisions on whether to have a parent stay home. Plus, there’s still the ongoing COVID pandemic, another reason parents may not wish to enroll a child, who can not yet be vaccinated against COVID-19, in a care environment. And, some child care centers have lost employees, or closed entirely.

“Women are having a harder time getting back into the labor force, because of COVID, because of uncertainty, because of caregiving in the household,” said Cohen.

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While some are predicting a recession, or suggesting that the US economy is already in the midst of one, Dr. Cohen disagrees.

“We don’t, I don’t anticipate a recession,” Cohen said. “My favorite economic indicator, is the spread between the 10-year and 3-month treasuries.”

Cohen called this relationship a “perfect predictor of recessions,” adding that he has tracked this data for 30 years, and the relationship between the two has predicted when a recession is coming, though not a precise, set timeline.

Charting the relationship between the two financial products is a mechanism for “forward-looking markets to anticipate what’s going on in the economy and what’s going to happen with inflation,” said Cohen.

Another positive sign for the economy? Aggregate hours worked in April increased by 0.4%, and are up 4.3% year-over-year, said Cohen.

“Aggregate hours worked is highly correlated with GDP,” said Cohen. “There is a very strong relationship.”

So while GDP took a dip in the first quarter, leading to recession concerns for some, Cohen remains unconvinced a recession is around the corner.

“Assuming we get any productivity growth, that would imply we see a strong GDP growth in the second quarter, relative to the decline in the first quarter,” said Cohen.

These factors, taken together, said Cohen, “suggests that the likelihood of a recession is very low.”

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