It would be hard to find a recession now. Another story is on the way.
The US created 528,000 jobs in July, but there is no precedent to show that an economy can create that many jobs in a single month. Unemployment is not consistent with contraction.
Even though there isn't a recession ahead, it is the labor market's resilience that could pose the biggest long-run danger. Pressures on a historically tight jobs situation are being alleviated by the Federal Reserve in an effort to control inflation, which is at its highest level in more than 40 years.
Jim Baird, chief investment officer at Plante Moran Financial Advisors, said that the Fed has more room to tighten even if it causes the economy to go into recession. It is going to be difficult to continue to tighten without hurting the economy and consumer.
Following the robust job numbers, traders increased their bets on a more aggressive Fed. The central bank is expected to raise its interest rate by 0.75 percentage point in September, according to the markets.
While President Joe Biden celebrated the big jobs number on Friday, there could be more bad news on the way. Even with a drop in gasoline prices in July, the consumer price index is expected to show continued upward pressure.
That will make it difficult for the central bank to balance the need to temper inflation with avoiding a recession. According to Rick Rieder, chief investment officer of global fixed income at asset management giant BlackRock, the challenge is how to execute a soft landing when the economy is coming in hot.
Rieder said that the stronger than anticipated print complicates the job of the Federal Reserve in trying to moderate inflation. How long will rates have to go up before inflation can be brought under control?
Markets were betting against the Fed.
The 2-year Treasury note yield was higher than the 10-year note for the first time in over two decades. The phenomenon of an inverted yield curve is a telltale sign of a recession. The inversion has been in place since the beginning of July.
That doesn't mean a recession is imminent, only that one is likely over the next couple of years. It means the central bank has some time on its side, but it also means it won't have the luxury of slow hikes, something policymakers had hoped to avoid.
"This is certainly not my base case, but I think that we may start to hear some chatter of an inter-meeting hike, but only if the next batches of inflation reports is hot."
Sonders said the current situation is a unique cycle in which demand is shifting back to services from goods and poses multiple challenges to the economy.
Economists fear the toughest part of the journey is yet to come.
Frank Steemers, senior economist at The Conference Board, said that the economy is likely not in recession because of a strong labor market. It is increasingly likely that the U.S. economy will fall into recession before the year ends.
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