How a shockingly resilient jobs market saved the US from a recession

• There are still plenty of jobs to be had in the US.
• Several measures point to the labor market's resilience and how it's saved us from a recession so far.

Many thought there was a chance 2023 would be the year the US slides into a recession again. But the economy continues to defy gravity.

While many different economic indicators factor into determining whether the US is in a downturn or not, one part of the economy that has been especially resilient this year is the labor market.

"Over the first few months of 2023, the labor market has evaded expectations of a collapse — repeatedly kicking the can of recession forecasts further into the future," Aaron Terrazas, chief economist at Glassdoor, told Insider. "By most conventional definitions, a recession requires a broad based contraction in employment — not just a narrow industry-specific contraction, or a slowdown in growth, but outright declines in employment across the economy. There was virtually no signal of that in last Friday's jobs report."

Julia Pollak, chief economist at ZipRecruiter, also pointed to the "virtuous cycle" happening in the labor market as one reason the US hasn't entered a recession — in addition to public investment.

"With so many Americans gaining jobs and labor market income in recent months, people are going to restaurants, baseball games, casinos, and Taylor Swift concerts," Pollak told Insider. "They're booking air tickets and planning hotel stays. That activity is fueling demand for ever more workers."

The US added 253,000 jobs in April per Friday's report, way above the forecast of 180,000 and higher than the revised gain of 165,000 for March. Nick Bunker, the head of economic research at the Indeed Hiring Lab, told Insider the smaller growth estimates for February and March due to the revisions are "still strong, especially given the underlying pace of population growth and the current level of unemployment." The unemployment rate declined to 3.4% in April.

"Even the sort of the weakest parts of the job market are still doing remarkably well in the face of enormous headwinds," Pollak said.

Bunker said there's especially demand for in-person, high-contact positions. The leisure and hospitality industry, which includes lots of in-person jobs at businesses like restaurants and hotels, saw a gain of 31,000 jobs in April.

Several measures from Friday's jobs report show the labor market is stronger than it's been in decades. The prime-age employment-population ratio, or the share of Americans aged 25 to 54 who have a job, was 80.8% in April — an estimate not seen since May 2001. The prime-age labor force participation rate, which measures the share of the same age group with a job or looking for work, hit 83.3%, the highest since March 2008. Both of these notable highlights were pointed out in Bunker's commentary.

Other parts of the economy suggest movement towards a recession-free "soft landing." The Consumer Price Index, or CPI, one measure of inflation, has also been slowing down. The year-over-year percent change in the CPI has cooled from 9.1% in June 2022 to 5.0% in March 2023.

With inflation still above the 2% goal, the Fed recently did its 10th interest rate hike in a row, raising rates by 25 basis points. There could be a pause announced at the next Federal Open Market Committee meeting in June, which could lower the odds of an impending recession this year.

"While Federal Reserve Chair Jerome Powell stopped well short of announcing an end to rate hikes, he emphasized during his press conference following the latest 25-basis-point hike that the Federal Open Markets Committee (FOMC) had adjusted its statement to reflect a less aggressive stance," Brent Schutte, chief investment officer of the Northwestern Mutual Wealth Management Company, wrote.

But Terrazas pointed to potential concerns in the labor market and for interest rates.

Potential "pent-up labor demand after the torrid jobs market of 2021 and early 2022" as well as aging, immigration, and "labor-leisure preferences" impacting the available supply of workers are two potential reasons why the "labor market has evaded expectations of a collapse," he said.

"If it's the former, it's just a matter of time before gravity catches up with the labor market," Terrazas said. "If it's the latter, then there are bigger worries out there about long-term inflation and higher baseline interest rates for the foreseeable future."

Overall though, the different robust labor market data suggests the US could maybe avoid a recession as has been the case so far in 2023.

"While there's still an elevated chance the US enters a recession this year, the current strength of the labor market indicates we aren't in one yet," Bunker said. "Continued robust job and wage growth means households can continue to spend and power forward economic growth."

Terrazas also thinks that post-pandemic changes in the economic landscape could lead to lower growth and higher inflation for longer.

"It's going to take a lot more work to get back down to 2% inflation than it did in the past, and the more policymakers have to push their coarse levers, the greater risk there is of overdoing it," he said. "For that reason, I still think there's a reasonably high odds that we enter a recession by the end of 2023."

And Pollak thinks there could be "huge risks ahead."

"We know that monetary policy operates with a lag. We know that it often hits job growth through a credit crunch. We are seeing deposits leave smaller local banks," Pollak said. "There is substantial reason to believe that that huge engine of job growth and job creation in America will sputter in the coming months as credit becomes less available."

David Kelly and Stephanie Aliaga of J.P. Morgan Asset Management said "the real concern in the economy right now is not the labor market, but the tightening in business conditions from the fallout of the regional banking crisis. We continue to see concern for an economic slowdown in the second half of the year, which should at least keep the Fed on pause and likely will even warrant a pivot to rate cuts later in the year. "

Despite potential risks in the job market, Pollak believes there's a possibility that the US continues to avoid a recession.

"GDP, excluding inventories and foreign trade, grew at a robust 2.9% in the first quarter, and the GDPNow estimate for Q2 is also strong," Pollak said. "The economy may avoid a recession, barring a more serious, systemic banking crisis, debt crisis, or financial event."