Return to Work and Recession Odds

Episode Summary

Executive Summary: The hosts reviewed a strong but cooling May 2022 jobs report: payrolls rose 390,000, unemployment held at 3.6%, participation improved, and wage growth eased modestly. They argued the labor market is still hot enough to pressure the Fed, even as goods demand, retail, autos, housing, and GDP look softer. Overall, the economy was seen as in transition rather than recession, with recession risks elevated but not yet dominant.

Main Topics: May 2022 jobs report: strong but slowing (Priority: 5/5): Payrolls rose 390,000 with broad-based gains led by leisure/hospitality, construction, professional/business services, transportation, and government education, while retail declined sharply. Panelists emphasized the labor market remains very strong but is decelerating from prior months. Labor supply recovery and participation (Priority: 5/5): Household survey data showed the unemployment rate steady at 3.6%, participation and employment-population ratio edging up, and prime-age female participation continuing to recover. The panel stressed that labor supply growth is improving, which helps reduce inflation pressure. Retail, autos, and the shift from goods to services (Priority: 4/5): Retail employment fell unusually, especially at big-box stores, and vehicle sales softened sharply. The group linked this to a post-pandemic rotation away from goods and toward services, along with higher gas prices and changing consumer behavior. GDP weakness vs. underlying economic strength (Priority: 5/5): The hosts debated why GDP looked weak despite strong jobs. They argued that inventories and net exports distorted GDP, making it a poor read on underlying domestic demand. The economy was characterized as transitional rather than recessionary. Housing slowdown and inflation transmission (Priority: 4/5): They discussed falling lumber prices, rising mortgage rates, softer housing activity, and likely cooling home prices. Housing was portrayed as the main interest-rate-sensitive sector where Fed tightening is already showing up. Recession risk, confidence, and market psychology (Priority: 4/5): The group discussed whether recession fears from CEOs, surveys, and yield-curve talk could become self-fulfilling. They concluded sentiment matters, but hard data like claims, spending, and labor market strength still argue against an imminent recession. Fed policy and market reaction (Priority: 4/5): The panel said the strong jobs report supports the Fed’s anti-inflation stance, making a September pause less likely. They noted higher bond yields and weaker equities reflected good-news-is-bad-news dynamics as the market repriced policy expectations.

Key Arguments: Payroll growth slowed from prior months but remained exceptionally strong at 390,000, signaling a hot labor market that is cooling only gradually. The unemployment rate holding at 3.6% and rising participation suggest labor supply is improving, which is necessary to relieve inflation pressure. Retail weakness and lower vehicle sales likely reflect a post-pandemic shift away from goods, not just seasonal noise or supply constraints. GDP is being distorted by inventories and net exports; the labor market and domestic spending are better gauges of underlying economic health. The economy is in transition, not a classic recession, because jobs are still being added and layoffs remain low. Housing is weakening as mortgage rates rise, and falling lumber prices indicate tighter financial conditions are working through rate-sensitive sectors. Recession risk is real and may rise with confidence shocks, but a recession is not yet supported by broad hard data. The Fed likely wants slower job growth, not collapse; the report was broadly consistent with the policy goal of cooling demand without triggering a sharp downturn.

Data Points: Nonfarm payroll employment change: 390,000 - May 2022 payroll increase, described as better than expected ADP payroll estimate: 128,000 - Weak private payroll proxy discussed before the official report Unemployment rate: 3.6% - Held steady for the third straight month April payroll revision: -30,000 - April job gain revised down Combined March-April revision: -22,000 - Prior two months revised lower in aggregate Leisure and hospitality employment: +84,000 - Largest sector gain in the payroll report Retail trade employment: -61,000 - Largest sector decline in the payroll report Construction employment: up strongly - Above February 2020 level; noted as a sign of strength Transportation and warehousing employment: up sharply - Gain tied partly to trucking Prime-age employment-population ratio: 80.0% - Rose from 79.9% for ages 25-54 Prime-age female labor force participation rate: 76.6% - Reached near pre-pandemic levels Average hourly earnings monthly change: 0.3% - Rose 10 cents month over month Average hourly earnings YoY: 5.2% - Wage growth remained elevated but moderated Weekly hours worked: 34.6 - Unchanged; not signaling near-term job weakness Part-time for economic reasons: rose - Increase driven by people whose hours were cut by employers People not in labor force due to pandemic: 455,000 - Down from 586,000, indicating labor supply recovery Childcare employment: 937,000 - Up slightly in May, still below pre-pandemic level of a little over 1 million Job openings: 11.4 million - Near record highs, indicating persistent labor demand Initial jobless claims: 200,000 - Seen as very low and inconsistent with an imminent recession Light vehicle sales: 12.7 million - Fell from about 14.5 million the prior month Total vehicle sales: 13.1 million - Weak reading including heavy trucks Lumber price: $598.50 - Down sharply from pandemic peak, signaling housing slowdown Lumber peak during shortage: over $1,600 - Referenced as the prior extreme high Pre-pandemic lumber level: $450 - Used as a benchmark for normalization Q2 GDP tracking estimate: 1.5% - Positive but weak and vulnerable to a negative print Q1 GDP: -1.5% - Initial quarter of the year showed contraction Current U.S. oil price: $117 per barrel - Contributing to high gasoline prices and recession anxiety Gasoline price in California: $6.08 to $6.30 per gallon - Cited as evidence of consumer pain at the pump U.S. oil consumption: about 20 million barrels/day - Down by about 1 million barrels/day from normal due to higher prices Excess savings: $2.5 trillion - Viewed as a cushion supporting consumer spending Recession odds by one speaker: 40% (12 months), 60% (24 months) - One panelist raised near-term and medium-term recession risk estimates Recession odds by another speaker: 33% (12 months), 50% (24 months) - A more moderate risk assessment from another panelist Recession odds by another speaker: 45% (12 months), 80% (24 months) - Higher long-horizon recession probability estimate

Pivotal Quotes: "The economy is in transition" — Chris: Used to describe the overall state of the economy amid shifting goods/services demand and crosscurrents "We need to get back down to something like 150K at most per month to be consistent with labor force growth and make sure that unemployment stabilizes" — Mark Sandy: Explained why job growth must slow further for the Fed to tame inflation without driving unemployment lower "This is what they want. They want things to slow down." — Ryan: Discussing why the Fed would welcome moderation in job growth rather than continued boom-level hiring

Implications: Listeners should expect continued labor-market strength but slower growth, more weakness in goods, housing, and consumer durables, and a Fed that remains focused on cooling demand. Recession risk is elevated, but hard data still argue against calling one yet.