Private payrolls in the US defied pessimistic forecasts and rebounded sharply in June, the Labor Department reports. Although some analysts recently insisted that the weak gain in jobs in May was a sure sign that a new US recession in the near term is fate, today’s data complicates that dark forecast.
Companies hired 191,000 workers last month, more than double the gain in May. Today’s report strengthens the view that the surprisingly soft rise in May was another anomaly that’s periodically afflicted monthly payrolls comparisons. But once again, the swoon has proved to be the exception, or so the June numbers suggest.
The bigger lesson is that trying to draw reliable insights from the volatile monthly changes in payrolls is misguided at best. As usual, the one-year trend offers a more robust measure of the trend. By this standard it’s still clear that growth is slowing, but for now the claim that a new recession is imminent is little more than a guess.
Private payrolls increased 1.8% in June vs. the year-earlier level. That’s the softest gain in 13 months, but it’s still well above a pace that’s historically been associated with the start of an NBER-defined contraction.
The economy’s bears counter that there are other tell-tale signs that show that a recession is brewing, including the inverted 10-year/3-month yield curve. True, but there are many other relevant numbers that suggest otherwise, including other slices of the yield curve. For example, the 10-year/2-year spread, another widely followed yield gap that’s said to be useful for macro analysis, has yet to go negative, which suggests that the inverted 10-year/3-month spread’s signal isn’t a fool-proof smoking gun quite yet.
In any case, it’s best to assess a broad, diversified set of macro and financial indicators to develop a reliable and timely measure of recession risk. One interpretation is updated on these pages each month (here’s the June report) and more frequently in The US Business Cycle Risk Report. The main takeaway on both fronts: recession risk remains low.
To be fair, growth has been slowing. But at this stage, it’s short-sighted to equate decelerating growth with a high probability that a new contraction is imminent. News flash: the US economy has hit soft patches several times since the last official recession ended in 2009. The notion that we’re currently in another soft patch that stabilizes or gives way to a reacceleration is still the most-compelling read on a broad set of indicators — until the data tells us otherwise, in a convincing degree.
Yes, that view can change as new numbers are published. At some point the outlook will turn reliably darker. Meantime, no one can make that call in the here and now by looking at one indicator, particularly by way of the latest data point.
The past decade confirms no less. But the usual suspects refuse to learn this lesson, which is why there’s been a steady flow of recession predictions over the past ten years that have been dead wrong.
One day a flawed business-cycle model will be correct, of course, in the same way that a broken clock is accurate twice a day. Genuinely reliable and timely recession-risk estimates, by contrast, require more than simply cherry-picking the data du jour to support an otherwise flimsy economic forecast.