Positive US Employment Report Flashes Higher Risk of Recession
The federal government’s jobs report on Friday was quite a bit stronger than expected, with nonfarm payrolls expanding by 223,000 and the unemployment rate ticking down to 3.5%.
Employment growth is perhaps the single-most important macroeconomic force guarding against recession, so it was definitely surprising when my recession-forecasting model showed an increase in the probability of a recession sometime in the next 12 months.
Among the industries reporting the strongest employment growth were leisure and hospitality at 67,000 jobs, healthcare and social assistance at 74,000 jobs, and construction at 28,000 jobs. State government and education showed a decline of 24,000 jobs.
My model still doesn’t predict a recession. The probability sits at just 22% following the employment report, meaning that the available data still isn’t convincing. The estimated recession probability increased from just 0.2% in April, peaking at 53% in September before dropping back down to 8% in November.
Still, three factors cause me to be pessimistic about the recession outlook going forward.
First, the recession probability has increased from 8% two months ago to 13% last month to 22% this month. Historically, my model has shown the estimated recession probability increasing during the months before a recession, except in 2020 when the onset of the COVID recession was a complete surprise.
Second, the near-term forward spread turned negative just before Thanksgiving. A negative value for the near-term forward spread essentially means that investors believe the Fed will have to reduce interest rates in the not-too-distant future to protect against economic softness. I don’t put much stock in the recent yield curve inversion, but I find the near-term forward spread more convincing as a recession predictor.
My third reason for concern is Friday’s report itself. Since the onset of the pandemic, I’ve been paying attention to the difference between seasonally adjusted and unadjusted figures because the COVID disruptions have played havoc with the seasonal adjustment factors. The report’s unadjusted figures were much less positive than the seasonally adjusted numbers. For example, total nonfarm employment was down 244,000 on an unadjusted basis compared to its positive 233,000 adjusted figure.
I honestly don’t know how important that is. After all, the purpose of the seasonal adjustments is to give us a more accurate reading, and what I’m saying is that I can’t tell if it did. But it’s a concern.