0:01

N.P.R. Have

0:12

you ever been on an airplane when it's

0:14

approaching the airport and instead of landing the

0:16

plane just starts to circle? And

0:19

at first you're like, this is fine,

0:21

but the longer you wait the more

0:23

this feeling in the pit of your

0:25

stomach starts to grow. Yeah,

0:27

and then the pilot gets on the intercom and says

0:29

something like, you

0:32

don't even understand it. And you

0:34

keep circling and more time passes. And

0:37

before you know, every little bump and dip

0:39

sends you into this low-key panic. You start

0:41

to think to yourself, is something

0:43

wrong? Are we going to have to land soon? And

0:45

when we do, is everything going to be all right?

0:48

If you ask us, that's a pretty good analogy

0:50

for the economy right now. For more

0:52

than two years, the Federal Reserve has tried

0:54

to tame inflation by raising interest rates. The

0:57

idea was that it would cool down the economy

0:59

and bring inflation down to its 2% target. And

1:03

so for months, it feels like we've been circling

1:05

the runway, wondering when inflation

1:08

will finally get back to normal and when

1:10

we finally land, is it going to be

1:12

a soft landing or a hard one?

1:15

And last Friday, the economy just hit

1:18

one of those stomach churning bumps. This

1:21

is the indicator from Planet Money. I'm Adrian Ma. And

1:24

I'm Darian Woods. The monthly jobs

1:26

report on Friday showed the US

1:28

labor market cooling. And it

1:30

kind of sent this shockwave through the stock market.

1:33

But is it a sign that we might be

1:35

in for a hard landing and a potential recession?

1:38

Or is it just some temporary turbulence? Today

1:41

on the show, we'll talk to two economic

1:43

analysts who are divided on that very question.

1:51

That comes from our 2024 lead sponsor

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2:56

Thanking the people who make public

2:58

radio great every day and also

3:00

those who listen. It

3:03

has been a dramatic week for financial

3:05

markets here and around the globe. Corporate

3:08

earnings disappointed investors. Major stock indices

3:10

slumped. And Japan's biggest stock market

3:12

saw its worst day in decades.

3:15

That's after its central bank raised

3:17

interest rates and investors who had

3:19

been borrowing up yen at near

3:22

zero interest cut and ran. But

3:24

one of the most important measures of the

3:27

economy's health is in stocks or bonds or

3:29

exchange rates, it's jobs. And

3:32

on Friday, we in the U.S. got some

3:34

rough news on that front. It seems

3:36

to have catalyzed the sudden downturn in

3:38

the markets. The latest jobs report

3:40

showed job growth slowing down a lot

3:42

in July and the unemployment rate rising

3:44

to 4.3%. And

3:47

a lot of economists when they

3:49

saw this said some version of, oh,

3:51

this is a bad sign. A

3:54

sign that the Federal Reserve in its

3:56

efforts to tame inflation had held interest

3:58

rates too high for too long. long

4:00

without cutting them. And now the

4:02

chance of a hard landing and a recession

4:04

just went up. Right now,

4:06

the Fed's key interest rate is around 5.3%.

4:08

It's at this 23-year high. And a

4:13

friend of the show, Julia Pollack, is among

4:15

those economists who are worried that the Fed

4:18

has been overly cautious in not cutting that

4:20

rate sooner. Julia's chief economist

4:22

at the jobsite ZipRecruiter. I

4:24

think people were worried because on Wednesday,

4:27

Fed Chair Powell held interest rates steady

4:29

and told us that labor market conditions

4:31

had returned to where they stood on

4:33

the eve of the pandemic. That's

4:35

a quote. But

4:37

on Friday... Who's saying that things are going

4:40

back to normal? He said things were normalizing.

4:42

But the jobs report on Friday actually

4:44

suggested that the labor market is materially

4:46

weaker than it was on the eve

4:48

of the pandemic and deteriorating rapidly. And

4:51

that is why people think the Fed

4:53

is behind the eight ball. Julia

4:55

gave us three reasons why the

4:57

labor market isn't going back to some

5:00

pre-pandemic normal. First, with

5:02

the exception of the health care sector,

5:04

the private sector job market has been

5:06

growing slower than pre-pandemic levels. Second,

5:09

Julia says the unemployment rate, while it

5:11

hit near historically low levels last year,

5:14

has been inching up. And between June

5:16

and July, it went from 4.1% to

5:18

4.3%. That

5:21

is a pretty substantial increase.

5:25

And that suggests that the labor

5:27

market is slacker and slower and

5:29

weaker than before the pandemic and

5:31

that American households are really starting

5:34

to feel it. Finally, she said

5:36

there's this thing called the S.A.R.M. rule.

5:38

It's this indicator that has a pretty

5:40

good track record of predicting recessions. And

5:43

right now, this indicator is flashing

5:45

red. Then the

5:48

three-month moving average of the unemployment rate

5:50

rises 0.5 percentage points above

5:53

the low point in the year before. That's all a bit

5:55

of a word sandwich, but stick with me.

5:58

Then that also... often signals the

6:00

beginning of a recession. So

6:03

historically, when the unemployment

6:06

rate goes up that much, it tends

6:08

to go up by two percentage points

6:10

more afterwards. But it could go

6:12

up all the way to 6.3% if

6:15

history is a guide. And

6:17

that would suggest a real recession. You're

6:20

saying we don't often see unemployment go

6:22

up this much without going up significantly

6:24

more. It's not like we see a

6:26

little bump and then it'll come back

6:28

down. Exactly. The reason is that deterioration

6:31

of the labor market can set off

6:33

a vicious cycle where people

6:35

lose their jobs, they cut their spending, businesses

6:38

then see revenue fall. What do businesses

6:40

do when they see revenue fall? They

6:42

cut more jobs. So

6:44

you can get into a spiral.

6:47

Okay. I guess to summarize, things in

6:50

your opinion are not going back to

6:52

a pre-pandemic normal, they

6:54

are entering kind of a

6:56

concerning phase where we're worried about

6:58

potentially entering this negative spiral that

7:00

you talked about. Right.

7:03

So for two years, the labor

7:05

market was normalizing. It

7:07

was coming back to normal

7:09

from an incredibly unusual, unprecedented

7:12

set of circumstances, which were

7:14

leading to overheating and inflation.

7:17

But it has already gone past normal and

7:20

is now getting weaker. And that is

7:22

the disconnect between the Fed

7:24

speak and what people

7:27

in the market on Main Street are

7:29

seeing. So that's Julia's

7:31

take. But not everybody watching

7:33

the kerfuffle over Friday's jobs report

7:35

agrees it's time to worry. For

7:38

that perspective, we called up Matt Klein.

7:40

Matt has been a columnist with the

7:42

Financial Times and Barrens, and he currently

7:44

writes a newsletter called The Overshoot, which

7:47

is focused on economics and the markets.

7:49

Matt says the numbers in the last

7:52

jobs report look worse than they actually

7:54

are. What we're seeing with the

7:56

rise in unemployment rate is very different from

7:58

what we've seen in prior downturns. Remember, the

8:00

Unemployment rate counts people who are actively looking

8:02

for a job. And Matt

8:04

says the rise in unemployment last month

8:06

was driven mostly by what are called

8:09

new entrants and reentrants to the job

8:11

market. A new entrant might be

8:13

people who just graduated from school and began their

8:15

job search. A reentrant would be

8:17

somebody who took a break from working and

8:19

is now back on the job hunt. In

8:22

short, not all upticks in unemployment are

8:24

equal. And so I'm not saying that

8:27

everything is fine, it's just that it's a

8:29

very different set of dynamics than we're used

8:31

to. Right, somebody losing a job

8:33

and that pushing up the unemployment rate is different

8:36

than somebody deciding, I'm going to get in the

8:38

game, I'm going to look for a job. Right.

8:41

And so that makes me think that overall we should

8:43

be somewhat more sanguine about the job market than what

8:45

sort of the headline data are suggesting. You

8:48

know, some people are talking about, okay, well, after

8:52

last week that the

8:54

Fed, having held

8:56

off on cutting interest rates so far, definitely

8:58

needs to make a pretty significant cut come

9:01

September. Maybe it should even make

9:03

an emergency rate cut sooner. What

9:06

do you think about this? I don't think so.

9:08

I mean, I've generally been of the view that

9:10

the US economy has done remarkably well, considering that

9:12

people say like interest rates are high. I mean,

9:14

there are certainly data you can cherry pick like

9:16

the unemployment rate is like, oh, like the economy

9:19

has gotten a lot worse. Clearly we need to

9:21

do something. But then you can look at things like, you

9:24

know, the GDP numbers, for example, or like other,

9:26

you know, measures of spending or wages or what have you.

9:28

And you think, okay, like actually the

9:30

US economy is growing not only

9:33

basically the same as it was since before the

9:35

Fed started tightening, but in some ways better. Be

9:38

that as it may, there is a lot of

9:40

pressure on the Fed to get to cutting those

9:42

interest rates. And the Fed

9:45

chair Jerome Powell has said a cut could

9:47

be on the table when Fed's Board of

9:49

Governors meets again in mid-September. I can

9:52

hear them sharpening those interest rates years right now.

9:54

Yeah, he did promise he definitely will, but we

9:57

could hear those knives glinking in the background at

9:59

the press conference. This

10:01

episode was produced by Cooper Katz McKim with

10:03

engineering by Maggie Luthar and Robert Rodriguez. It

10:05

was fact-checked by Sierra Juarez and Corey Bridges.

10:08

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