Pollack: Recession or not?

The Monday Morning Quarterback

A quick analysis of important economic data released over the last week

By Elliot D. Pollack & Co. | Rose Law Group Reporter

Are we headed for a recession or not?

The U.S. labor market remains historically tight, with many employers competing for a limited pool of workers and bidding up wages despite an uncertain economic outlook. Employers added 263,000 jobs in November, holding near the strong gains of the previous three months, when they averaged 282,000 a month, the Labor Department said Friday. Job growth has slowed from the first half of the year and continues to exceed its 2019 pre-pandemic pace, though some large corporations have recently announced layoffs.

The jobless rate remained at 3.7% last month, a historically low level that is pushing up wages. Average hourly earnings grew 5.1% in November from a year earlier, holding above the pre-pandemic pace of roughly 3%. One reason employers might continue to raise pay briskly: Labor force participation, or the share of adults working or seeking a job, remains below pre-pandemic levels and ticked down last month.

A June survey from the Financial Times reported that two-thirds of U.S. economists believed a recession would hit next year. CEOs are also worried, with 98% of corporate leaders preparing for a recession over the next 12-18 months, according to an October survey from the Conference Board.

Some however, like Brian Moynihan, CEO of Bank of America, is predicting a mild recession, if it comes at all. He expects the U.S. economy to contract by just 1% for the first three quarters of 2023, then return to positive growth.

Then there are others that predict the opposite. In October, Nouriel Roubini, the New York University professor often dubbed “Dr. Doom” for his predictions about the 2007 housing crash, said he expects the U.S. to face a long and ugly recession. Last week, Mohamed El-Erian, chief economic advisor for Allianz, called out banks predicting a “short and shallow” recession in an op-ed for the Financial Times. El-Erian says he worries that they risk repeating the mantra that inflation is transitory.

Low unemployment and wage gains are helping fuel consumer spending—the economy’s main engine—but also contributing to inflation that is running close to a four-decade high.

The jobs report keeps the Federal Reserve on track to raise interest rates in two weeks by a half percentage point, which would bring the benchmark federal-funds rate to a range between 4.25% and 4.5% from its current range. It also underscores the risk that officials will lift the rate above 5% in the first half of next year.

Revised wage data released Friday could concern Fed officials because it points to an acceleration in pay gains in recent months. Average hourly earnings grew swiftly in November from a month earlier across industries including retail, transportation-and-warehousing and information services.

Gross domestic product rose at a 2.9% annual rate in the third quarter after falling in the first two quarters of 2022, a stronger-than-expected performance that eases fears about an imminent recession. The 2.9% growth in the third quarter was revised up from the first estimate of an increase of 2.6% issued last month by the Bureau of Economic Analysis. Economists had expected the revised number to remain at 2.6%, according to FactSet. Experts forecast the economy will grow again the fourth quarter, with the Federal Reserve Bank of Atlanta expecting an expansion of 4.3%.

The upward GDP revision in the report Wednesday primarily was led by increases in consumer spending and nonresidential fixed investment. Exports, state and local government spending, and federal government spending also helped lift overall output. Imports, which count as a subtraction in the calculation, decreased more than previously estimated.

The contraction in the first half of the year worried many that the economy was either headed toward or possibly already in a recession. However, strong jobs data caused many experts to say the country had not hit a recession. Growth coming in stronger in the third quarter, along with estimates for more growth in the fourth, is a good sign that the U.S. hasn’t hit a recession just yet. The main question is how can we have an unemployment-less recession? Until we see some movement in unemployment rates, the onset of a recession will keep being pushed out.

U.S. Snapshot:

  • The Institute for Supply Management (ISM) manufacturing PMI index signaled a contraction in the manufacturing sector in November. The index was below 50 for the first time since May 2020. While the manufacturing sector is contracting, an index reading of 49 remains above the level associated with a recession across the economy.
  • Payrolls rose by 263,000 in November as the unemployment rate remained to 3.7%. Gains were primarily in Education & Health services (82,000) and Leisure & Hospitality (88,000). The increase surpassed economists’ expectations, as the Fed’s inflation fight is expected to affect the job market in the coming months.
  • Job openings fell 3.3% in October to 10.3 million. The number of hires outpaced the number of separations 6.0 to 5.7 million. The number of quits remained above 4.0 million for the 17th consecutive month. Job openings have remained historically high despite strong hiring.
  • U.S. GDP was revised upward to 2.9% from 2.6%, easing fears of a recession. The upward revision was due to an increase in consumer spending and nonresidential fixed investment. Economists expect growth in the fourth quarter.
  • Personal income grew by 0.7% for the month of October as consumer expenditures were slightly higher, up 0.8% for the month. Consumer spending continued to be strong into October.
  • Consumer confidence declined to 100.2 from 102.2 in November. Inflation and higher interest rates will continue to be on consumers’ minds going into 2023.

Arizona Snapshot:

  • September’s Case-Shiller Index data was released last week, and the negative streak continued. Home prices in Greater Phoenix and the Composite-20 index declined for the third consecutive month on a monthly basis. Year-over-year growth remains above double digits but declined significantly in the second half of the month. The monthly decline in Greater Phoenix was 2.2% outpacing the Composite-20 drop of 1.5%.
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