Opinion - Commentary

Op-ed: Investors must look past rosy unemployment figures to spot the recession beneath the surface

A trader works on the floor of the New York Stock Exchange (NYSE) in New York City, June 1, 2022.
Brendan McDermid | Reuters

This is the truth: Several times in the past few months, I have said that we might be in a recession already.

Many businesses were slowing after a sharp reopening burst, and then the results for the first quarter confirmed a 1.5% decline in real gross domestic product. We were halfway there

However, I hedged my bet, recognizing that the 3.6% unemployment was so low that it was very unlikely that we were in a decline. Wouldn’t that be a sign of a strong economy, not the opposite?

Further, the agency that officially declares a downturn — the National Bureau of Economic Research — uses several factors beyond output, including unemployment, in its definition of a recession.   

In fact, as the table below illustrates, the lowest level of unemployment at the start of any recession in 50 years has been 4.7%. That's 30% higher than the current rate. It just defied logic.


Recently, I began to consider the labor numbers in a different light.

A ramp-up in inventory and personnel

One retailer after another announced that it had acquired too much product over the past year. They were drowning in a sea of heat lamps, recliners, throw pillows, and kayaks. Even the owner of my bike shop, where the next arrival of a new bike was something like my 70th birthday, bemoaned the presence of excess inventory at all the local stores.  

Having double or triple ordered when supply chains were inextricably clogged, the shop owner never expected that all those bikes would suddenly appear at once in June 2022. Now, they are on sale.

Perhaps the same phenomenon might have occurred in the labor market. As the economy reopened in early 2021, businesses and organizations that had been closed for a year, ramped up hiring. However, stimulus checks, relocation, remote work and the uncharted pandemic waters rendered the re-employment effort complicated and unpredictable. No one has yet written the definitive post-Covid human resources manual.

With surging consumer and corporate demand, and the anticipation of continued sales growth, employers scrambled to build headcount. The feeding frenzy in some hot sectors, such as IT support and software engineering, seemed like the NBA draft. 

The economy added an average of 540,000 jobs in the 17 months since the beginning of 2021, driving the unemployment rate down to unexpectedly low levels in short order. All these new jobs reinforced the prevailing belief that we were experiencing a strong rebound, not an impending recession. 

A hiring head fake?

On the other hand, those waves of hiring might have been a head fake for market watchers and a mistake for employers. With limited visibility, but an accompanying fear of missing out on talent, businesses may have overstaffed as many also added too much inventory.    

Each recession, save one, during the past half century, was accompanied by lost jobs and depressed consumer spending. The wreckage, following the bursting dot-com bubble in 2000, mostly targeted the overheated tech and biotech sectors of the economy. Given that inflation is pushing 9%, retailers are admitting distress, and the strong dollar will hurt international sales, evidence is mounting that we are in or close to a recession.

The first-quarter nominal growth was 6.5%, and with inflation running at 8.6%, it will be difficult for nominal sales output to surpass that level. Anything less tips us into a recession.   

It is naïve to assume that a 3.6% unemployment rate will save the economy. While I may have been faked out by those high employment numbers, I am ready to consider a new interpretation. I also might be in the market for a new bike.

Karen Firestone is chairperson, CEO and co-founder of Aureus Asset Management, an investment firm dedicated to providing contemporary asset management to families, individuals and institutions.