Big payroll gains push recession fears into the corner — for now

June’s big jump in wages helped lift some of those recessionary clouds for the U.S. economy, which nonetheless faces turbulent times.

The 372,000 job gain convinced most Wall Street economists that the idea of ​​a first-half recession was a “fantasy,” as one put it. An unemployment rate of 3.6% hardly corresponds to an economic downturn, at least for the six months of 2022 that are in the back view.

But there will still be plenty to deal with going forward, as persistently high inflation and multiple interest rate hikes test the economy’s ability to stay strong.

“I think we have a ways to go,” said Vincent Rinehart, chief economist at Dreyfus and Mellon. “It was a report long on evidence of aggregate demand and short on evidence of aggregate supply. But four straight months of nearly 400,000 job creations makes you feel a little different about the possibility of two straight quarters of GDP decline. “

For the record, the U.S. economy shrank 1.6 percent in the first quarter and is on track to shrink 1.2 percent in the second quarter, according to the Atlanta Federal Reserve’s GDPNow tracker. Two consecutive quarters of negative GDP is a widely accepted definition of a recession.

But that comes with monthly job gains this year averaging 457,000, even with a modest slowdown that began in March. The unemployment rate has held at 3.6 percent over the past four months, a combination of solid wage gains and persistently low labor force growth.

Still, there were a few weak signs in the report, such as a 315,000 drop in the Labor Department’s household survey. The labor force suffered an outflow of 353,000 and there are still about two job vacancies for every available worker, exacerbating the inflationary phenomenon where supply is lagging well behind demand across the economy.

Then there is the broader perception that the unemployment rate is the worst leading indicator of a recession, with jobs typically continuing to rise in the early days of a recession and then continuing to fall in the early days of a recovery.

But anyone trying to find signs of recession in the hiring practices of corporate America will come up empty.

“Overall, the jobs data supports our view that talk that the economy is currently in recession is a hoax, while the payroll numbers show that inflationary pressures are easing,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. He added that “the recessionary story has been overstated” by markets and the Fed is still likely to continue raising interest rates.

It is these interest rate hikes, and the inflation they seek to control, that are causing concern that all is far from clear for the local economy.

Average hourly earnings rose 0.3% from a month ago, but were still up 5.1% on a 12-month basis. Stronger-than-expected wages and jobs figures are unlikely to dissuade Fed officials from approving a 75 basis point rate hike at their meeting later in July.

Overall, inflation ran at an 8.6 percent annual rate in May, according to the consumer price index. New CPI data is out on Wednesday, with economists expecting the number to be even higher given the jump in gas prices for the month.

If inflation persists and interest rate hikes continue, it could slow the economy enough to send it into recession in the next year or so. Many economists have recently raised their odds of a recession, expecting a decline to begin either in late 2022 or early next year.

“The U.S. economy is still expanding and job growth is strong enough to avoid a recession for now, but aggressive rate hikes could cause a significant slowdown,” Wilmington Trust said in response to the jobs report. “We expect the US and global economies to avoid recession over the next 9-12 months, but risks have risen.”

Investors are keeping a close eye on the jobs and inflation reports, and are also keeping an eye on the Atlanta Fed’s measure of GDP, which adjusts regularly with incoming data and becomes more reliable as quarter-end data comes in. The tracker was looking for a 1.9% drop in the second quarter, but Friday’s data improved that picture to a 1.2% drop.

While that still puts the U.S. in what is traditionally considered a recession, Atlanta Federal Reserve President Raphael Bostick told CNBC that the branch’s economists see the economic picture as pretty good.

“The core of the U.S. economy still looks very strong, and that’s what we need to focus on,” he told CNBC’s Steve Lisman during an interview on “Squawk Box.”

Bostic stressed the need to keep inflation in check, but in relation to the GDPNow indicator, he said there was “much more than any single number can tell you”.

“Our focus is still pretty positive about where the economy is,” he said. “We’re concerned about inflation, and to me that’s where our focus has really gravitated over the last few months. … We will try to reduce inflation while keeping the economy as strong as possible.”