Lies, Damned Lies, and Statistics

A recession will either be one of the most anticipated to ever occur, or one of the most anticipated to not occur at all. At its core, the recession debate is all about jobs. If the job market stays strong, it’s not only very hard to have a recession, it’s also very hard to get inflation under control because labor shortages imply higher wages.

The Fed, of course, is attempting to rein inflation in while limiting damage to the economy. They interpret that as requiring some increase in the unemployment rate and they are raising interest rates to get there, but the statistics appear to say that jobs, while beginning to weaken, remain stubbornly high. After a brief pause, the Fed appears ready to raise rates a bit more to ‘get the job done’. The problem is that the job statistics are about as clear as mud. Here’s a look at some key 2023 data:

  • The monthly jobs report consists of two surveys, the Establishment, or Payroll survey, and the Household Survey. The inconsistencies in the data are maddening. The two surveys are very inconsistent month to month and were especially so in May when the payroll survey showed an initial gain of 339,000 jobs, while the household survey showed employment falling by 310,000! After six months of data, about all that can be said is that job creation might be slowing down.
  • There are also inconsistencies with other data. The unemployment rate remains very low and without any discernable trend. Average Hours Worked, which is considered a key in identifying trend changes, popped back up to 34.4 in June, breaking a down trend. Average hours worked are considered a precursor to unemployment as hours are cut before employees are cut. Increasing average hours implies the opposite.
  • The one thing that appears clear is that wage inflation remains. Average Hourly Earnings continue to grow at about 4.5% annually and that is something that is simply not acceptable to the Fed. Inflation cannot get back to 2% if wages are growing at more than twice that rate.
  • According to the JOLTS report (Job Openings and Labor Turnover Summary) the number of job openings fell again in May to 9.8 million, but that is far more than the 6.1 million unemployed workers that are supposedly out there, which may explain the increase in wages.

The question that has been bothering markets for the last year remains: Is the labor market strong or not? The data does not supply a clear answer, yet it is precisely this data that is a key to the Fed decision making process. The conflicting data certainly does not provide that warm fuzzy feeling that the Fed actually knows what it is going on.

And that is exactly the problem. There are three possible outcomes:

  • The Fed believes the job market is stronger than it actually is. This would risk interest rates being raised too high, pushing us into recession;
  • The Fed believes the job market is weaker than it actually is. This would risk not raising rates enough to tame inflation and creating a resurgence of inflation; and
  • Whatever the Fed believes about jobs is correct AND they react appropriately, resulting in no recession and inflation under control.

Because the Fed is so focused on addressing inflation now and not allowing it to get out of hand again, we judge the risk as being greater that the Fed raises rates too far, as opposed to not enough. Therefore, we would place the odds as follows:

Recession: 1 in 2 chance; lies

Renewed inflation: 1 in 3 chance; damned lies

Just right: 1 in 6 chance; a happy statistical accident


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By: Adam