A Familiar Song & Confetti

Today, Chairman Powell reiterated the US is not in recession and will continue to grow in the second half of 2022. Other public officials agree, US Treasury secretary Yellen and US President Biden recently affirmed their own “no recession” opinions. The argument emphasizes a strong labor market and an unemployment rate that hovers near the lowest levels in decades. Investors celebrated the optimism and risk assets are rallying.

The problem is unemployment is a lagging economic indicator. The unemployment rate is almost always low before recessions. By the time unemployment rises meaningfully, the economy is typically already contracting. Figure 1 shows the historical relationship between unemployment (blue line) and recessions (grey bars).

Figure 1

The “no recession because of low unemployment” argument sounds naive at best and deceptive at worst. But should we really be surprised? Politicians and policymakers are often elected and appointed on public opinion.

It behooves public servants to sing whatever the people want to hear. Often that’s a song of eternal hope and optimism. The lyrics change but the tune remains the same. People don’t want to hear the Fed or the POTUS publicly announce we’re going into recession and there’s nothing we can do about it.

This is not to say a recession is imminent, nobody knows when the next recession arrives (though we may find out soon with Q2 GDP numbers pending). But it is to say we should not take everything we hear from policymakers at face value. It is a reminder that low unemployment readings are not what they may seem, so investors may want to hold the champagne and confetti.

Victor K. Lai, CFA

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