The U.S. economy isn’t in a recession yet, but the number of industries cutting back on headcount is concerning, and future revisions to jobs data could show employment is already falling, according to Moody’s Analytics chief economist Mark Zandi.
This time, Zandi pointed out that the start of a recession is often unclear until after the fact, noting that the National Bureau of Economic Research is the official arbiter of when one begins and ends.
Zandi said payroll employment data is by far the most important data point, and declines for more than a month consecutively would signal a downturn. While employment hasn’t started falling yet, it’s barely grown since May, he added.
Because recent revisions have been consistently much lower, Zandi said he wouldn’t be surprised if subsequent revisions show that employment is already declining.
“Also telling is that employment is declining in many industries. In the past, if more than half the ≈400 industries in the payroll survey were shedding jobs, we were in a recession,” he added. “In July, over 53% of industries were cutting jobs, and only healthcare was adding meaningfully to payrolls.”
Last week, Zandi said data often sees big revisions when the economy is at an inflection point, like a recession. And on Wednesday, Federal Reserve Governor Lisa Cook similarly noted that large revisions are “typical of turning points” in the economy.
There are also no signs of mass layoffs as weekly jobless claims haven’t spiked, and the unemployment rate has barely changed, bouncing in a tight range between 4% and 4.2% for more than a year.
But Zandi said the jobless rate will be a “particularly poor barometer of recession” as the recent decrease in the number of foreign-born workers has kept the labor force flat.
“Also note that a recession is defined by a persistent decline in jobs — the decline lasts for at least a few months. We aren’t there yet, and we are thus not in recession,” he explained. “Things could still turn around if the economic policies weighing on the economy soon lift. But that looks increasingly unlikely.”
Coupled with the lack of any signs that unwanted separations are surging due to immigration policy, this is a strong signal that business demand for labor has cooled, they said.
“We have consistently emphasized that a slide in labor demand of this magnitude is a recession warning signal,” JPMorgan added. “Firms normally maintain hiring gains through growth downshifts they perceive as transitory. In episodes when labor demand slides with a growth downshift, it is often a precursor to retrenchment.”
