Employment Remains Strong and Inflation Easing Despite Recession Fears – Why We’re Getting Mixed Signals

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Key learning points:

  • The US economy is doing well when looking at unemployment and inflation numbers. But the stock market is not – reminding us that the two are not the same.
  • Although layoffs have recently been seen in the technology sector, this portion of the US labor market is relatively small. The vast majority of the job market is hot, although the headlines we’ve seen might lead us to believe otherwise.
  • The pandemic continues, and as much as America tries to put it in the rear, the economic fallout facing both our country and our global trading partners is fueling feelings of uncertainty about the future.

December’s employment and inflation numbers were pretty good – and looking at the various measures of the economy as a whole, it doesn’t look like we’re headed for a recession.

If that’s the case, why do things feel so flimsy?

Part of our general malaise may be that while the economy is performing well, the stock market is not. To top it all off, major companies making big headlines have faced layoffs, even though their employees make up only 2% of the US workforce.

Another source of fear is that the Fed is playing a dangerous (though arguably necessary) game. Raising interest rates to lower inflation risks creating a recession. It’s one we haven’t seen happen yet, though, and the most recent numbers indicate that the Fed may have a soft landing.

Here’s what you need to know and how Q.ai can help you navigate the uncertainties.

Employment figures

Unemployment rates had been at pre-pandemic levels for several months, but fell even further in December 2022 to just 3.5%. In the economy as a whole, there are 1.7 jobs open to every unemployed American.

Hourly wage growth slowed in December 2022, from 5% growth in September 2022 to 4.6%. While that’s not spectacular news for workers, inflation is starting to slow down at the same time.

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Inflation is slowing

While Fed Chairman Jerome Powell has acknowledged that there is no evidence that wage growth has caused or fueled inflation, he has also frequently cited this as a reason why the Fed has had to be so aggressive with rate hikes over the past 10 months. If the decline in wage growth continues, it could prompt the Fed to slow the pace of rate hikes.

Annual inflation peaked at 9.1% in June 2022. The latest figures from November 2022 show a slowdown to 7.1%. This is still far from ideal, as the Fed’s goal is to bring it back to 2% or less. Even if it’s “not good enough,” the delay still makes sense. It indicates that we are on the right track.

If things are good, why do they feel so scary?

Looking at the indicators the National Bureau of Economic Research (NBER) considers when officially announcing a recession, things are still looking good. Aside from inflation, there aren’t many factors pointing to a recession right now.

Then why do things feel so uncertain? There are a few factors at play.

The stock market is not the economy

If you’re heavily invested in the stock market, the past year has probably felt financially painful. While the economy is in a recovery process, the stock market has floundered. Many people confuse the two, thinking that a stock market downturn automatically signals a recession. But in reality, the two are unattached, even though they overlap from time to time.

To give an example of this, we need only look back to the start of the pandemic in 2020. At a time when unemployment was hitting the double digits and food banks in US cities were lining up, the K -shaped recovery caused the stock market to skyrocket.

What is happening now is the reverse. Over the past year, the same factors that have depressed inflation have had a negative impact on investor sentiment. Higher interest rates mean that future returns on investments decrease, even if bond yields rise. The conservative option is starting to look better than relatively volatile stocks.

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And the stock market suffers. Nor is it just the abstract idea of ​​the stock market. Real companies with real employees can suffer under these circumstances, especially if they work in specific sectors.

The tech sector has been hit several times

Big Tech is woven into everyone’s everyday lives, so news reports of thousands of technology layoffs seem like a bigger problem than they actually are. Some of these layoffs come with simultaneous hiring frenzy as companies restructure, but to be fair, some were outright contractions.

The technology sector is particularly sensitive to stock market fluctuations as their products are considered to be very risky. It is difficult for them to attract investor dollars unless the stock market sentiment is rosy.

This sector also has outsized business relationships with China compared to other sectors of the US economy. Trade policies between China and the US have become restrictive over the past year.

Even with the cumulative tens of thousands of layoffs, the technology sector represents only 2% of the US job market. The US job market is strong, even if the technology sector is suffering in a unique way.

Contraction is a result of falling inflation

A consequence of the Fed rate hike is lower inflation, but that lower inflation is achieved through a general market contraction. Part of the reason so many worry about a recession is because it’s a picky game the Fed plays. The line between successfully lowering inflation and plunging the country into recession is thin.

Over the past month, more economists have become optimistic that the US can avoid a recession, even in a high interest rate environment. Our salvation is the labor market.

While it appears that unemployment will not be a problem for the foreseeable future, it will be interesting to see whether wage growth continues to slow. At 7.1% inflation, even a 4.5% wage increase is not enough to keep up with the cost of living. If that gap widens, it could spell trouble for the average American consumer.

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Which none of us want to admit

While federal policy moves us further away from acknowledging the pandemic every day, the fact is that it still deeply impacts our lives and the economy as a whole.

Absenteeism and bereavement have taken center stage this past year as so many Americans have fallen ill and there is less support for workers who must stay home to recover than in previous pandemic years. For a long time, COVID causes disability and death, both of which are problems when they affect the workforce.

Even if the United States really is done with the corona virus, other countries are definitely not. In our global economy, the spread of disease in China is definitely impacting supply chains and markets around the world, including the US. While China is not the only country struggling with this virus, it does produce one of the world’s leading GDPs.

it comes down to

We may avoid another recession in 2023. But even if it succeeds, the economic atmosphere is strange despite all the good news.

It is especially uncomfortable if you have invested a large amount of money in the stock market. If you’re a long-term investor, hopefully you have the perspective that this too will pass. Over a longer time horizon, the stock market has risen historically. There is a bump in the road right now, but these bumpy times are to be expected and should be built into your plans.

If you want to invest even in times of market downturn, it can be useful to combine Portfolio Protection with your Investment package. With this Q.ai product you can protect your profits and hedge against the worst potential losses.

Download Q.ai today for access to AI-powered investment strategies.