The economy added almost 600,000 jobs per month in the first quarter, yet GDP declined. It looks like the current recession will be mild, though.
The Bureau of Labor Statistics just reported a whopping 528,000 new jobs were added in July. That brings the unemployment rate down to 3.5%. It also means that the total number of employed Americans is finally as high as before the pandemic. This is definitely good news.
The increase in employment was broad-based in that 388 of the 389 metro areas saw an increase in the number of employed Americans. While the decrease in total demand seen in the last six months means the economy has entered recession, firms have not cut back on hiring yet.
Normally when output declines and a recession starts, business will reduce the number of workers they hire. That means the newly unemployed workers suffer a reduction in income and the economy, overall, contracts and these unemployed reduce their consumption. That reduces demand further and makes the recession worse.
Employers Use Current Resources
During the current recession, most firms are not reducing staff. Rather, they are simply eliminating the job openings that they have not been able to fill since the pandemic started.
In other words, suppose a small business needs 10 workers to operate efficiently. The company has been employing nine workers for the past year, mostly because they have been unable to find any new workers. They’ve had a job opening for more than a year.
Now, as the economy slows, the business owner does not lay off a worker. Rather, the job opening for the 10th worker is withdrawn and the firm is happy to have just nine people employed. The mild recession we are apt to see in 2022–23 means a sharp reduction in job openings with only a slight increase in unemployment.
As long as the recession remains mild, unemployment will not increase as much as it has in prior recessions. However, proposed monetary and fiscal policy may worsen the economic picture. The Fed at this point is locked into its hawkish position and will have to maintain its very aggressive interest rate increase policy, mostly because it was so late to react to the current inflation.