The news Friday that the economy added more jobs than expected last month has counterintuitively raised fears of a recession.
The red-hot labor market, which has remained buoyant despite the Federal Reserve’s efforts to slow spending via interest rate hikes, notched 263,000 new jobs last month, the Bureau of Labor Statistics reported Friday. Monthly job growth has averaged 420,000 so far in 2022, a strong pace at this stage of the cycle.
While the stock market and economists usually celebrate reports like Friday’s, the current economic situation is almost inverse because of the fear that the Fed will now have to take even more aggressive action to slow economic activity.
Indeed, just after the report was released on Friday morning, stocks began to tumble.
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As of midday, the Dow Jones Industrial Average shed about 500 points or about 1.6%. The tech-heavy Nasdaq composite plunged by nearly 3%, and the S&P 500 had about 2.1% of its value erased in the hours after the jobs report dropped.
The economic uncertainty is also captured by the Chicago Board Options Exchange Volatility Index, better known as the VIX or the “fear index.” The index was up more than 2.3% on Friday and is up about 88% since the start of the year.
The Fed has been raising rates to tamp down inflation, which has been running at the highest level in four decades.
By hiking short-term interest rates, the central bank influences all rates, including on mortgages, credit cards, and corporate bonds. The higher rates are intended to slow economy-wide spending and lower price pressures. If the Fed goes too far, though, mass layoffs could ensue.
The Fed has had to scale up its plans for raising rates dramatically. Late last year, the Fed expected to only hike rates a few times this year by a quarter of a percentage point, or 25 basis points. Last month, following a two-day meeting of the Federal Open Market Committee in Washington, the central bank announced that it would hike its interest rate target by 75 basis points. The move marks the third consecutive rate hike of that scale, equivalent to nine standard 25-basis-point increases.
The Fed’s interest rate target has risen by 2.25% in the past four months, the most forceful rate hike since the Great Inflation of the late 1970s and early 1980s. The target is now 3% to 3.25%, the highest it has been since the financial crisis in 2008.
“We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses,” Fed Chairman Jerome Powell, who has become increasingly hawkish, said last month. “Over the coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%.”
Powell has made clear the Fed is focused on crushing inflation, even if it means an economic downturn. While gross domestic product growth has been negative for two straight quarters, a classical sign of recession, the labor market has kept the economy above water and given the Fed more leeway in continuing its big rate hikes.
Expectations of another monstrous hike rose on Friday following the jobs report.
Investors are now pegging the odds of another three-quarters hike at just over 81% and pricing in about an 18% chance of a 50-basis-point hike, according to CME Group’s FedWatch tool, which calculates the probability using the prices on futures contracts. A week ago, the odds of a 75-basis-point increase were only at 56%.
Chris Campbell, the chief policy strategist for Kroll, told the Washington Examiner that the robust September jobs report raises the odds of a “painful recession.”
“The good news is that we remain at near full employment, which means that most everyone that wants a job can find one, but in a high inflationary environment, that is also the bad news,” he said. “With a strong jobs number, we are almost certain to see the Federal Reserve continue to raise interest rates and use its other tools to slow the economy and bring down inflation.”
A Bankrate survey of economists conducted each quarter found that those polled placed the odds of a recession at 2-in-3 over the next year to year-and-a-half. A hefty 86% of the economists also said that the balance of economic risks is tilted to the downside.
“The downside risk is a trap door about to open and send the economy plunging into the abyss of recession,” said former Fed official Robert Brusca, the chief economist at Fact and Opinion Economics. He said the odds of a recession occurring was at 100%.
The Bankrate survey also found that the average forecast unemployment for a year from now is at 4.4%, about 1 percentage point more than the country’s current level of unemployment as gauged by the Bureau of Labor Statistics.
Weekly jobless claims have also remained low in another sign that the labor market is humming along and weathering the Fed’s rate hikes. Jobless claims generally declined in August and September, meaning that layoffs are rare despite interest rates rising. Claims increased last week, although that had declined in six of the past seven weeks, bucking expectations.
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As the Fed continues to hike rates, though, fewer jobs are expected to be added in the coming months, and the number of jobless claims is predicted to trend upward as a recession becomes an ever-more-likely scenario.
“It seems as if the consensus is that a recession is more likely than not, and the job market weakening would be part of that process — not knowing the timing, duration, or magnitude of a recession,” Mark Hamrick, a senior economic analyst at Bankrate, told the Washington Examiner during an interview.
