Dismal Jobs Numbers May Not Mean What You Think

First, the gloomy news: A jobs-data revision yesterday from the US Labor Department showed that 911,000 fewer positions were added in the 12 months through March than previously estimated. That’s a bigger dip than even most pessimists had predicted, triggering fears of a recession.

But what if the revision is the final clue revealing the US economy has already been in recession for a couple of years, and that we may be in a recovery? That’s not some wild Reddit conspiracy. It’s the theory posited in a splashy new research note from Morgan Stanley. 

Rolling With the Punches

Let’s flashback to 2022. In late July, the US Bureau of Economic Analysis reported that the US economy contracted 0.9% in the second quarter of the year, following a 1.6% contraction in the first quarter. It triggered widespread questioning over whether the US economy had tipped into recession territory. After all, every period of two consecutive quarters of negative growth has coincided with a recession in the US since 1948. But the National Bureau of Economic Research (NBER), the official arbiter of the recession question, never declared one. US GDP returned to growth by the third quarter (and the bureau later revised Q2 numbers to show a small amount of growth as well), and the recession narrative gave way to debate about stamping out inflation without triggering a recession.

But a team of Morgan Stanley analysts led by chief US equity strategist and CIO Mike Wilson says the first recorders of history got it wrong. The reason few noticed, they posit, is that the US has been in a “rolling recession,” with different sectors passing through periods of contraction at their own pace. The downturn was also obscured by strong post-COVID consumer spending as well as “over-hiring for the past few years” in the public sector, “somewhat masking” underlying weakness in the private sector.

The good news? There may be signs that the “rolling recession” is coming to an end — and more rocking times are soon to come (not for nothing are we called The Daily Upside): 

• “We’re not of the view that a rapid/acute rise in the unemployment rate and/or significantly negative payroll numbers are coming,” the analysts wrote, noting that some signals point to “Liberation Day” in April marking the rock bottom of the jobs market, with a recent upward revision to jobs data in July showing that a rebound may be underway, barring “another shock to the economy.” 
• The analysts also pointed to median Russell 3000 companies returning to earnings growth this summer, after a sojourn in the wilderness since 2021, as a sign of recovery, as well as a so-called V-shaped recovery to earnings share breadth in the S&P 500.

Fed Up: Recession or not, Tuesday’s jobs revision has traders now all but certain of a quarter-point rate cut by the Federal Reserve during its meeting next week, likely followed by at least one more quarter-point cut later this year, according to CME Group’s FedWatch tool.