The Dreaded R word: Recession Looms Following Dismal Jobs Report

The jobs report released today by the U.S. Bureau of Labor Statistics for the month of October showed that while the unemployment rate remained unchanged at 4.1%, the number of jobs added came in at a very low 12,000 for the month of October. This comes after the number of jobs added in September was a robust 223,000.

Despite averaging over 190,000 jobs added each month in the past year, the job additions in October indicate a notable decline in a crucial coincident indicator - payroll employment. This indicator provides insights into the current state and future direction of the economy, with its fluctuations often signaling shifts in overall economic activity. While most key industries experienced job losses or minimal growth, the few sectors that positively impacted the overall job numbers were primarily in health and education. These industries tend to remain resilient during recessions, although their job gains were lower compared to the previous month.

Source: Bureau of Labor Statistics

Although some analysts are suggesting that this decline might be temporary, a troubling aspect of the data is that wholesale trade added over 10,000 jobs. This increase is expected to reverse significantly, as it seems to have been an overestimation by wholesale businesses of anticipated demand downstream, which now appears muted. This is evident from the fact that the retail trade sector lost over 6,000 jobs in October. Wholesale businesses would be expected to adopt a cautious approach, which could potentially lead to job cuts in the industry in the upcoming months. The outlook for spending appears bleak as we approach the holiday season at the end of the year, with a looming possibility of a recession if one is not already underway.

Although the unemployment rate held steady at 4.1%, This media focused labor market indicator is actually a lagging economic indicator that does not provide real-time insights like the current employment level does on the state of the economy. Instead, it reflects overall economic changes after they have already taken place. As a result, it is expected to start rising only after a downturn has occurred, and if so, it should start to rise in the coming months. The Federal Reserve's previous decision to cut interest rates by 50 basis points in September now appears to be justified, and it is possible that the Fed will proceed with another aggressive 50 basis-point interest rate cut.

The jobs report however comes after news that the U.S. economy grew in the third quarter by 2.8%, contributing to the expectations by many economists that the FED would implement more conservative cuts of 25 basis-points at its next two meetings before the end of the year. Given this report, that may change when the FED meets in the couple days following the November election. It is important to note that while the second quarter's final growth estimate was 3.0%, the 2.8% growth reported for the third quarter is a preliminary estimate, suggesting that the actual third quarter growth could potentially come in lower once additional data is available and revisions are made.