The Big Picture

In his most recent semiannual monetary policy testimony before Congress, Fed Chair Powell said, "there's no evidence or no reason to think that the U.S. economy is in some kind of short-term risk of falling into recession."

Some might beg to differ given the longstanding inversion of the Treasury yield curve or the 23 consecutive monthly declines in the Leading Economic Index, but where they can't quibble with the Fed Chair's belief is the employment data. It categorically refutes the notion that the U.S. economy would fall into a recession in the short term.

Seeing Is Believing

We will shift our attention to the February Employment Situation Report in due course, but straight ahead is a glimpse of some other employment data that refutes the idea of a recession unfolding in the short term.

We begin with the JOLTS data. This is lagging data admittedly (to wit: we just got January data on March 6), but it is informative nonetheless with respect to the number of job openings.

In January, there were 8,863,000 job openings. That is down from a peak of 12.2 million in March 2022, but it equates to 1.37 job openings for every worker counted as unemployed in the February employment report. There isn't a shortage of available jobs, then, as one might see in a recession.

There isn't an excess of initial jobless claims either, as one might see in a recession. This is perhaps the most important indicator for the labor market since initial jobless claims are a leading indicator.

What we know now is that the four-week moving average for initial jobless claims is just 212,250. That is well below averages seen over the course of prior recessions, as seen in the table below, and it signifies that companies in aggregate are still reluctant to let go of their workers. The same goes for the 3.9% unemployment rate seen in February.

Source: NBER; FactSet

38 Straight

Hiring activity has slowed from the frenetic, post-pandemic pace, but February marked the 38th straight month of gains in nonfarm payrolls -- and it was a solid increase, too, at 275,000 (the chart below excludes the period from March 2020-August 2020 to improve its readability).

In recessions, payrolls contract for an extended period. There were 14 straight monthly declines in nonfarm payrolls following the popping of the dotcom bubble in 2001. The Great Financial Crisis hurt even more. Monthly declines in nonfarm payrolls were registered in every month from February 2008 to February 2010.

Of note, the four-week moving average for initial jobless claims ran above 300,000 leading up to those respective recessions.

Aside from the encouraging payrolls data, real average hourly earnings remain positive. That is a support for continued growth in consumer spending, which accounts for nearly 70% of GDP.

What It All Means

Payroll gains may not be as robust as they once were, but they are not weak. In turn, average hourly earnings growth may not be as high as it once was, but it is running above the rate of inflation. Initial jobless claims remain low and there is an excess of jobs for unemployed workers still waiting to be filled.

The labor market remains on the economy's side. That means it also remains on the stock market's side, because the stock market has been rallying in part on the belief that the economy will not see a recession.

The risk of recession, though, is ever-present. It is part of the business cycle, but a recession warning is not flashing in the employment data -- not yet anyway.

What can be seen now in the employment data is an economy still operating in growth mode, which is integral for the positive earnings growth outlook that has underpinned the stock market and has supported multiple expansion.

--Patrick J. O'Hare, Briefing.com