Solid labor market cures many ails for the economy but can’t last forever

Hiring activity picked up again in April as labor demand shows little sign of easing. Spending activity also bounced back, buoyed by job gains and faster wage growth. Given the relative strength of recent data, it’s unlikely that a recession will start in the next few months, aside from a politically-induced government debt default. But leading indicators consistently point to high recession risks for later this year, an outlook supported by weakening activity across many sectors. While another rate hike is still on the table, a pause from the Fed in June remains most likely. Discussions on rate cuts are far off.

Current Trends

Job gains were strong in April as demand for labor remains strong and the labor market continues to be exceptionally tight despite the Fed’s sharp rate increases. Although most businesses expect weaker economic growth ahead, job listings are plentiful, wages are still rising rapidly in many sectors, and consumers still have significant pandemic-induced savings providing additional purchasing power to consumers. Consequently, inflation remains stubbornly elevated, particularly for services and housing. Equity markets continue to trend higher in 2023 even with a high probability of recession later this year and downside risks caused by bank credit tightening.

Future Outlook

The pre-recessionary period for the U.S. economy is being extended by strength within the labor market which is supporting further spending by households. But contractionary signals are expanding across sectors, while tighter lending standards from domestic banks pose a further downside risk for growth later this year. Weaker corporate profits and rising operational costs should weaken labor demand by businesses — likely starting as soon as the third quarter — to trigger the negative feedback loops that will lead to a downturn. But the economy continues to face multiple crosscurrents which make the timing of a recession difficult to pinpoint.