US Economy & Employment Trends in 2019

I don’t do forecasting professionally anymore, but I’m still an obsessive tracker of US economic data and try to have well-informed expectations of where they’re headed. So here’s my perspective on what the US economy and labor market are due for in 2019. (For purposes of accountability, here’s what I wrote a year ago about my expectations for the US economy in 2018.)

The biggest question on everyone’s mind is “Are we or will we soon be in recession?” That question’s first half is really easy to answer - we’re absolutely not in a recession at the moment. The US economy is still growing; the number of jobs is still increasing.

The second half of the question is harder to assess; the economy spends most of its time growing, not contracting, so recessions is are fairly rare, short and difficult-to-forecast events. (A lot of the folks who supposedly “called” the Great Recession are “permabears” who predict a recession every year; at some point they’ll be right again.)

If I had to take a crack at it, I’d say 2019 should be a year of continued expansion, but that the odds of recession are the highest they’ve been in about 3 years. Moreover, based on what we now know, those odds probably increase toward the end of 2019. The reason the odds are higher than they were in early 2017 or early 2018 is that the economic fundamentals don’t look great. Financial conditions have tightened and businesses are already showing more caution. There’s a trade war, a fading fiscal stimulus, a stronger dollar, a federal government shutdown, the possibility of “hard Brexit”... that’s a long list of headwinds.

The reason the odds increase toward the tail end of the year is mostly the nature of uncertainty: it grows the further in the future you go. In a normal year that “expanding cone of uncertainty” still considers recessions as a tiny tail risk; in a year with mediocre fundamentals like 2019, recessions are a relatively improbable activity that should nevertheless get serious consideration.

The Base Case: Mid Cycle Slowdown

Expansions aren’t uniform and the economy doesn’t progress at a metronomic pace. It’s probably faded into the memory hole for most readers of this piece, but the economy slowed down noticeably twice in the current expansion - during 2011-12 and again in 2015-16. Both instances saw a meaningful deceleration in the US economy and a tightening of financial conditions. Discussion of recession increased in the media during both slowdowns, yet the economy kept growing and eventually re-accelerated.

Nothing in the current slowdown looks meaningfully different, yet, than either of those mid-cycle slowdowns.  So what I expect for 2019 is leveling out, and maybe a little cooling, in gross and net hiring as employers become more cautious.

US GDP growth will drift back from around 4% during the middle of 2018 to around 2%. Despite some high profiles and concentrated sectoral pain in cyclical industries, we probably won’t see a pickup in aggregate layoffs - tweaking the spigot of hiring will be sufficient to manage the workforce to the vagaries of demand.

And of course, you’re probably wondering about wage growth. That’s one bit of relatively good news that probably won’t go away. Over the past 5-6 years the share of prime working age Americans who are employed has increased pretty steadily, and while the pace of further gains may slow, I don’t expect it will be reversed. That means a still-tightening labor market and further acceleration in pay growth.

What would change my mind?

It was hard not to look at the US stock market action near the end of 2018 and not get a little nervous about that the US economy might teeter from a “slow but positive growth” into “mild recession”; those worries have abated for now, but could return. Here’s what could tip the scales:

1. The Federal Reserve cranked the tightening thermostat too high. Monetary tightenings are an art, not a science. The Fed certainly doesn’t intend to push the economy into recession; it wants to achieve a goldilocks scenario where the economy and labor market keep expanding, but slow down just enough to keep inflation pressures in check. But monetary policy is a powerful, blunt weapon with “long and variable lags”, and maybe they overdid it, or will overdo it in the future.
2. One of the other headwinds we’re seeing intensifies more than anticipated, or a new headwind emerges. Perhaps a new crisis in the Eurozone or a potential “hard Brexit” causes a sharp spike in financial market turmoil; perhaps the government shutdown stretches out for a few months or even quarters; perhaps China slows a lot more than anticipated; perhaps something I haven’t thought of! An economy that’s growing more slowly is also more vulnerable to shocks tipping it over the edge.

What I’ll be tracking.

So let’s start with LinkedIn hiring data, which we share in our monthly workforce report. To date this data has showed a modest slowdown (off 1.0% from its summertime peak), consistent with the economy coming down a gear. But let’s say we start seeing hiring coming down pretty rapidly - like by a percentage point a month for a few months, it’s time to get a little more worried.

As far as non-LinkedIn data, I’ll be following a lot of it - but two particular widely-reported sets of economic data will merit close attention as leading indicators. The first is business surveys - are America’s employers becoming more or less optimistic about the economy? The second is initial filings for unemployment insurance (“initial claims”); if I’m right and we’ll avoid recession in 2019, then UI filings will remain dormant, but if we do end up tipping into recession, these will be one of the earliest signals.

I will also be paying close attention to financial market data. Back when I worked in financial services, people joked that the bond market is much smarter than the stock market, and while there was some self-flattery in that, I do think it has some merit when thinking about economic leading indicators. I’ll be paying close attention to the yield curve (are financial market telling us they think the Fed will cut rates going forward) and to the yield premium required to hold higher-risk corporate bonds. If the yield curve “inverted” or the corporate bond risk premium widened significantly, I’d become a lot more worried about a recession in the next year.