Many observers believe that the U.S. is nearing a recession or may already be in one. Still, the nation's unemployment rate has held steady for months at a relatively low 3.6% and job growth has continued to beat economists' expectations.

The robust labor market has befuddled analysts trying to forecast the next recession, since it seems to run counter to economics history. While every recession is different, each has a unifying hallmark: a surge in joblessness.

During the recession from December 2007 to June 2009, for example, the unemployment rate jumped from 5% to 9.5%.

But while inflation has rocketed to the highest levels in more than four decades and consumer confidence has plummeted, unemployment has stayed low and job growth has remained constant. The rosy jobs picture has raised doubt that a recession is on the horizon.

"I think it's unlikely we could have a recession without significant job losses and an increase in the unemployment rate," said Augustine Faucher, chief economist of The PNC Financial Services Group.

Recession defined

Real GDP declined by 1.6% in the first quarter of this year and will fall by 1.2% in the second quarter, according to the Federal Reserve Bank of Atlanta's latest forecast. That meets the standard definition of a recession as two straight quarters of declining GDP.

The National Bureau of Economic Research's definition is looser: a "significant decline in economic activity that is spread across the economy and that lasts more than a few months." Key measures include personal income and consumption expenditure changes; retail sales trends; industrial production; and, of course, employment.

"By [the NBER's] definition you cannot have a recession if unemployment stays low," said Christopher Douglas, an economics professor at the University of Michigan–Flint.

Low unemployment could help cushion the effects of towering energy prices and higher interest rates from the Federal Reserve's push to tighten monetary policy. One scenario, according to Ken Matheny, senior economist with S&P Global Market Intelligence, is a "growth recession," with a broad decline in economic activity rather than outright recession. The unemployment rate is likely to rise to 3.8% later this year and to nearly 5% in 2024, Matheny forecasts.

'Strange times'

Consumer surveys indicate that a recession is likely, potentially by early 2023, even as immediate views of the economy remain relatively confident.

The Conference Board's expectations index, a measure of consumers' short-term outlook for income, business and labor market conditions, sank to 66.4 in June, its lowest point since March 2013. The Conference Board's present situation index, a consumers' assessment of current business and labor market conditions, remained roughly level at 147.1 in June.

"Consumers, even though they're being buffeted by higher inflation and rising interest rates, they're pretty sanguine on what's going on right now," said Dana Peterson, The Conference Board's chief economist. "I think a lot of that has to do with the labor market being quite strong."

The U.S. added 372,000 nonfarm jobs in June and has added nearly 21.5 million jobs since bottoming out in April 2020. The U.S. labor market in June was still 524,000 jobs below February 2020, before the pandemic. Job growth has occurred even though economic output has declined and the consumer price index, the market's preferred inflation metric, jumped 9.1% from June 2021 to June 2022, its biggest increase since 1981.

"The economy is still adding jobs so we are clearly living in strange economic times," said Benjamin Keen, an economics professor at the University of Oklahoma.

Topsy-turvy

There were about 11.3 million job openings in the U.S. in May, or nearly two job openings for every unemployed American looking for work.

"In normal times, there are two workers looking for work for every one job opening," said Keen. "Thus, the labor market could experience a modest reduction in demand without leading to a meaningful reduction in employment."

This situation could allow the Fed to continue to fight inflation by raising its benchmark federal funds rate further without significantly boosting unemployment, Keen said.

The persistent strength of the labor market could cause a spiral, however, as higher wages needed to attract and retain workers contribute to high prices, forcing the Fed to take stronger measures, pushing further steep rate hikes forward, in order to fight inflation.

"This might eventually make the recession more severe," said Itay Goldstein, a finance professor at Wharton School of the University of Pennsylvania.

Unemployment claims rise

While most economists characterize the labor market as the tightest in decades, the domestic jobs picture has dimmed somewhat over recent months. Job openings, for example, fell about 5% in May from their March peak.

Hiring in sectors most sensitive to rising interest rates, such as construction, has slowed. Hires in the construction sector fell from 448,000 in April to 437,000 in May.

Initial unemployment insurance claims totaled 244,000 for the week ended July 9, up from 166,000 for the week ended March 19. This remains well below the historical average, said Faucher with PNC.

"It appears that laid-off workers are quickly finding new jobs in the tight labor market," Faucher said.

The pandemic has also likely caused a permanent shift in the labor market, said Douglas.

The employment-to-population ratio, a measure of the total number of people aged 25 to 54 working, was 0.7% lower in June 2022 than it was in February 2020. However, the ratio of workers of all ages remains 1.3% below the pre-pandemic level, a sign that older workers may have permanently left the workforce.

"Given the tightness of the labor market, a recession might not show up as an increase in the unemployment rate and layoffs like in previous recessions," Douglas said. "Instead, it might show up as job openings disappearing."