As of Aug. 9, 2022
If you find the economy confusing, you’re not alone. Employment is very strong, with the economy adding 528,000 jobs in July. Yet the economy contracted in both the first and second quarter of 2022. It doesn’t really matter whether we call this a recession or not; the economy has slowed. A decade ago, some referred to a “jobless recovery,” in which job growth lagged the economic recovery. We seem to be in the opposite situation now. What would cause strong employment with slowing economic output?
The answer to that question could be declining productivity. If worker productivity declined even a little, one would expect to see more demand for labor, decreased output and higher inflation. I won’t claim to know the cause, but I suspect that two years of COVID may have adversely affected the development of many workers, just as it’s caused some older workers to retire early. If so, it may take some time for productivity to return to prior trends.
There are also implications for Federal Reserve (Fed) policy around interest rates. Unlike the European Central Bank (ECB), which has a single mandate of stable prices, the Fed has a dual mandate of stable prices and full employment. The strong job growth likely moves the Fed’s attention toward its mandate of stable prices. The Fed could achieve its mandate by raising rates aggressively and inducing a recession in which employment could remain relatively strong.
We don’t currently anticipate a major recession in 2022 and are roughly neutral on our allocation to stocks. With economic growth slowing and a tight labor market, we continue to favor quality growth and technology companies that could benefit from these market outlook trends.