With recession fears starting to haunt the 2020 election, the Trump administration is pointing to factors like the nation’s historically low unemployment rate to calm nerves. The problem with that argument, economists say, is that unemployment is a lagging indicator of a recession. It doesn’t mean one won’t happen. In fact, it doesn’t say much of anything.
A recession would be a serious blow to the incumbent administration, which is planning on running on a robust economy in 2020.
“Consumers, first of all, they’re working. The employment numbers are terrific. Second of all, they are working at much higher wages. Third of all, they’re spending. And fourth of all, interestingly, they are saving, even while they’re spending. That’s about as good as it gets,” White House economic adviser Larry Kudlow told Fox News.
The unemployment rate is currently 3.7%, the lowest rate for the past half-century. However, historically, unemployment has usually been low before a recession hits. That’s because unemployment doesn’t spark a recession. It is the recession that creates unemployment.
“The low unemployment rate is very good, but it doesn’t tell us anything other than the economy is doing a good job of providing jobs at the moment,” said William Dunkelberg, economist for the National Federation of Independent Business. “But if things change and demand weakens, then unemployment will fall.”
If demand falls a lot — defined by economists as two consecutive quarters — then a recession could arrive. “The unemployment rate will be a lot more than 4 points at that point,” Dunkelberg adds.
Recession fears have been brought on by declines in corporate profits and investments and economic struggles in China and Germany. Economic uncertainty created by the White House’s ongoing trade war with China and its difficulties in getting the U.S.-Mexico-Canada Agreement on trade through Congress have further fed concerns.
The Labor Department’s July numbers showed gains of just 62,000, down from an earlier forecast of 72,000. It also revised June’s more robust gain of 224,000 down to 192,000. The downgrades added to the concerns that the economy is cooling, a sign of a recession.
“Sometimes you see a little bit of an increase in unemployment before a recession officially starts. That’s what we saw with the great recession of 2008, where it bottomed out in winter of 2007 and started rising after that,” said Michael Farren, research fellow at George Mason University’s Mercatus Center.
Ryan Bourne, economist for the free market Cato Institute, notes that the fact that unemployment isn’t still falling isn’t necessarily a bad sign. Employment rates and the odds for a recession just aren’t linked.
“I don’t think we can view the bottoming out of the unemployment rate at around 3.7% as telling us anything interesting about what is the likelihood of a recession,” Bourne said.
Employment may be even less of a predictor of a bad economy in general because over the last two decades, the rate has stayed so steadily low for so long. “In the post-1970 period, recessions usually happened at a much higher rate of unemployment, about 4.6% to, in the early 1980s, at about 7.8%,” Bourne said.
But that was when most economists thought a 5% jobless rate was as low as it could get. In the last two decades, economists have had to readjust that assumption.
The unemployment rate could even tick up and still be strong by historical standards, Dunkelberg notes. “If the unemployment rate went to say, 4.1%, a whole half a point, that would still be an economy doing well with unemployment historically low,” he said.
A better indicator of a recession, Farren said, is the current rate of hiring, because that shows whether businesses are growing or expect to grow. It is unusual in most industries to hire somebody for a short period of time. “And hiring is still going pretty darn strong,” he notes.
“The No. 1 rule they teach to sensible economists is ‘never predict the next recession,’” Farren said.
