CHAPEL HILL — A recession is still looming, says a UNC economist after the release of June labor numbers.
“I’ve been predicting a recession in the second half of the year, late 2023, early 2024,” said economist Gerald Cohen during a webinar hosted by the Kenan Institute Friday morning.
Cohen said that he is taking June numbers into account. The US labor market added 209,000 jobs in June, and the unemployment rate dipped to 3.6 percent, according to data released Friday morning by the Labor Department.
But he’s still predicting a recession.
“In my opinion, we’re still on the path for that,” said Cohen. “But, you know, if we continue to get 200,000 jobs, I’ll keep pushing it out.”
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Cohen explained that the labor market is back to the “tight levels” from pre-COVID—and that this will cause the Federal Reserve to raise its benchmark interest rate later this month.
“So one of the reasons why the Fed is raising rates is because not only have we surpassed the peak in employment, but we’re almost aligned with where job growth should have been,” said Cohen, referencing the pre-COVID trend.
Jobs relative to February 2020, with the dotted line showing the pre-COVID trend from February of 2020 and the solid line showing actuals | Source: Kenan Institute
“Effectively, we’ve come back from COVID, and we’re back to that trend in February 2020,” said Cohen. “The labor market was quite tight [then], so we’re kind of back to that tight level of the labor market that we saw pre-COVID.”
The tight labor market is one reason the Fed will continue to raise rates, said Cohen.
Another reason is inflation—what Cohen calls “the big boogeyman” of the Fed.
“The headline numbers have come down, and people are saying ‘Look, the Fed is done or close to done, they’re coming down,'” said Cohen. “But if you exclude food and energy prices, which drove some of that big increase and has driven the vast majority of the big decrease, you’re seeing inflation stubbornly stuck at around 4 percent.”
Cohen says that the Fed will continue to raise rates if inflation numbers are high.
“So this is why the Fed is saying, ‘Look, we still need to raise rates, because if food and energy prices stop falling, we’re going to end up with this 4 percent inflation rate,'” said Cohen. “And so inflation is going to look like it’s heading back up on an overall level, and then that’s going to affect people’s views on inflation and could embed high levels of inflation back into people’s thought process. And that’s why the Fed is so focused on this core inflation, on these inflation numbers, and on the tightness of the labor market.”
Data revisions show worse job market—could that make Fed “close to done” with interest rate hikes?
Cohen commented on another aspect of recent data—revisions to previous months’ reports.
“More importantly, in my opinion, were the downward revisions to the previous months,” said Cohen. “On net, there were 110,000 fewer jobs created than we thought between April and May. And that trend is worrying to me and, I think, worrying to others who watch this data closely.”
According to the release from the Labor Department, the change in total nonfarm payroll employment for April was revised down by 77,000, from 294,000 down to 217,000, and the change for May was revised down by 33,000, from 339,000 to 306,000.
Monthly revisions result from additional reports received from businesses and government agencies from the recalculation of seasonal factors, according to the release.
Cohen said that these revisions put a new perspective of the job market performance from earlier this year—and that new perspective may impact what the Fed does with interest rates.
“We’ve had a couple of months, where, yes, the reports were strong, last month was very strong,” said Cohen. “But then you’ve seen some downward revisions. So that’s something that, in terms of the dynamics, is worrying to me, and I think may suggest, not a change to what happens to the Fed at the end of July, but may signal they’re closer to done than people had previously thought.”
