The hot job market will likely prevent a recession, top strategist Ed Yardeni says

• Ed Yardeni thinks the economy can avoid a recession in 2023 as the consumer remains on solid footing.
• Yardeni is comforted by the fact that there has yet to be an economy-wide credit crunch.

The economy will likely avoid a recession in 2023 as consumers and the labor market remain on solid footing, market strategist Ed Yardeni told CNBC on Friday.

Yardeni said the economy will prove very resilient even after the Fed hikes interest rates to as high as 5% over the next several months because consumers are still holding onto their jobs and spending money.

"I think the economy is going to prove to be remarkably resilient. I think it can handle 5% to 5.25% on the Fed Funds rate," Yardeni said. Last week, the central bank raised its main interest rate to 4.25–4.5% and projected that it could raise rates to the range Yardeni suggested by the end of next year.

In addition to a hot labor market, Yardeni highlighted that credit markets are holding up very well even in the face of higher interest rates. And that type of labor and credit market strength isn't usually seen right before a recession.

"When you look at past business cycles, recessions are really caused by the Fed tightening, which is what's happening now, and the yield curve would invert, which is what's happening now, but what's different this time is we've had financial crises that haven't morphed into an economy-wide credit crunch, which in the past is what really caused recessions," Yardeni said.

The financial crises highlighted by Yardeni include the ongoing meltdown in cryptocurrencies, which has wiped out more than $2 trillion in market value, as well as the steep sell-off in speculative, unprofitable tech stocks that were all the rage in 2021. So far, those downturns haven't spread to other parts of the financial system or the broader economy.

"So I need to see more signs that the credit system really is challenged, and it looks pretty strong. It looks like it can handle 5% to 5.25% on the Fed Funds rate without a problem," Yardeni said.

But as long as consumers hold onto their jobs, then a credit crunch could ultimately be avoidable. The November jobs report was a beat above expectations, with 263,000 jobs added vs. estimates of 200,000, and year-to-date the US economy has added more than four million new jobs. The unemployment rate currently sits at 3.7%, just above its historic pre-pandemic low.

"It would be very unusual to have a recession when the labor market is this tight. Now I'll admit that the unemployment rate is usually at a record low or a cyclical row before recessions, but we've never seen a scenario where the economy has got such a strong, hot labor market. How do you get a recession out of that?" Yardeni asked.

"Consumers are seeing their wages finally going up faster than prices, I think the payroll employment remains strong. I think consumers will continue to spend, they're just pivoting to services. The financial system is in much better shape this time around and I don't think it's going to trip up the economy," Yardeni concluded.

Based on Yardeni's thinking, investors shouldn't anticipate an imminent recession until companies start firing their employees, and with consistent monthly job gains so far this year, that's just not happening.