At the start of 2016, global stock markets plummeted, rattled by China, oil, and fears that the Federal Reserve was dangerously out of step with monetary policies in Asia and Europe. The turmoil fueled speculation that the United States might be heading for recession, even as most indicators painted a picture of economic health.
A few months later, the panic looks misplaced. Global stock markets have rallied. U.S. job growth has been robust. And at its March meeting, the Fed reduced its long-term projections for interest rates, a welcome response to signals from the markets. The episode was yet another lesson that patience and perspective are powerful allies as we try to make sense of the markets and economy.
My guess is that those allies will be especially important in the months ahead. Although the risk of a recession is low, the U.S. economy is likely to experience “growth scares”—that is, periodic monthly job growth that falls short of consensus expectations. And seemingly subpar jobs reports will no doubt produce spikes in financial market volatility, perhaps amplified by recent pressure on corporate profit margins and the United Kingdom’s referendum on staying in the European Union. It may feel like January and February all over again.
Nearing full employment
Since the start of 2014, the U.S. economy has produced, on average, more than 200,000 net new jobs per month, driving the unemployment rate from 6.6% to 4.9%. (At its 2009 peak, the rate stood at 10%.) The broadest measure of unemployment, which counts marginally attached workers and those working part-time for economic reasons, has also registered big improvements. The numbers suggest that we’re nearing full employment.
At full employment, of course, net new job growth is constrained by the number of new workers. Over the past few years, about 70,000 new workers have entered the labor force each month. Working-age adults who had dropped out of the workforce can supplement this supply of labor, but the pool of potential workers is shallower than a cursory review of labor force participation trends would suggest.
The labor force participation rate has trended lower since the 1990s. The decline accelerated during the global financial crisis. In the past year, strong job growth has produced an uptick in participation. But rates are unlikely to return to their late-1990s peaks. Demographic and cultural trends such as the aging of the population and declining participation for 16- to 24-year-olds will most likely produce a continued, gradual decline.
Slower job growth, no recession
Our outlook suggests that job growth will moderate toward 150,000 or fewer net new jobs per month through the rest of the year. Consensus forecasts, compiled by the Federal Reserve Bank of Philadelphia, are higher: It sees job growth of between 180,000 and 195,000 in the first three quarters of 2016 and a decline toward 150,000 in the fourth. We also expect the pace of change to be uneven, with some monthly reports falling far short of our comparatively modest forecast. When reality breaks with the consensus, markets will react, and the noise will crescendo.
At this stage in our long economic expansion, however, slowing job growth is not a sign of recession. It’s a symptom of a labor market near full employment. As we explain in U.S. economy will bend, not break, our analysis of financial and economic variables puts the odds of a near-term recession at about 10%.
So brace for bad headlines. Prepare to put the data in a broader—and less alarming—economic context. And fight the fear with patience and perspective.
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