The Federal Reserve raised its key interest rate by a quarter point Wednesday, adjusting the federal funds rate to a range of 5.25% to 5.5%, the highest level in 22 years.
Some economists predict that an economic low – possibly even a recession – could follow a decrease in inflation, which was at 3% in June, down from 9.1% one year earlier.
However, job growth is still strong. Last month, employers added 209,000 jobs and average wages grew 4.4% annually. Initial jobless claims, a gauge of layoffs, have retreated toward historically low levels after rising in June.
This contradictory phenomenon is being labeled by some economists as a full or high employment recession.
What is a recession?
A recession is “a significant decline in economic activity that spreads across the economy and lasts more than a few months,” according to Michael Pugliese, an economist with Wells Fargo.
The metrics for a recession vary among economist experts, with many identifying a recession as two consecutive quarters of negative Gross Domestic Product (or two-quarters of negative growth). The nonprofit the National Bureau of Economic Research determines if the United States is officially in a recession.
The last two downturns happened when the economy was jolted by a housing crisis in 2008 and then the COVID-19 pandemic in 2020, which led to massive layoffs as many businesses struggled or were forced to shutter when people hunkered down in their homes.
A recession this year could be triggered by the string of rate hikes implemented by the Federal Reserve to tame inflation as the economy rapidly accelerated and the pandemic waned, some economists have predicted.
What is full employment?
President Franklin D. Roosevelt defined full employment as an economy in which any person who seeks a job can secure one. The textbook definition of full employment is the highest possible employment level in an economy that doesn’t increase inflation, according to the Bureau of Labor Statistics.
Today, policymakers and economists define the concept as 4% to 6% unemployment rate, using the standard measure of unemployment, according to the Center for Budget and Policy Priorities.
What is a full employment recession?
In a full employment recession, the capital sector of the economy would experience decline, as is typical in a recession, but the labor sector would grow or remain stable said Michael L. Walden, a Reynolds Distinguished Professor Emeritus at North Carolina State University.
Never before has the United States experienced a full employment recession, and Walden said it might not even classify, as definitions for a recession vary.
What causes a full employment recession?
Normally, as the Fed increases interest rates to slow inflation, spending and jobs both decrease, said Walden.
But job growth has remained strong with an unemployment rate at 3.6% in June according to the Bureau of Labor Statistics, despite interest rate hikes.
Walden attributes the labor market growth to the aftermath of the pandemic.
During the COVID-19 pandemic, the U.S. saw high rates of unemployment in the short term, followed by labor shortages and low unemployment as people returned to work. This post-pandemic job growth continues, even as other measures of economic success decline.
What would a full employment recession look like?
The good news is a full employment recession would not result in massive job losses for most Americans, said Walden.
The business sector, particularly the stock market, would experience less growth, a typical outcome of a recession.
“Since most people are not business owners, they don’t they don’t operate on the capital side, they’ve got jobs and paychecks, they will not feel the pain as much in a full employment recession as they would in a standard typical recession,” Walden said.
Leonard Lardaro, a professor of economics at the University of Rhode Island said that there’s no way to know exactly how long a full employment recession would last.
He said that existing wealth, savings from the pandemic and monetary and fiscal stimulus may lead to a “softer landing” as the economy slows down, as compared to a normal recession. However, if the capital sector is slowed for more than 5-7 months, he predicts a more traditional recession could ensue.
Contributing: Paul Davidson, Charisse Jones and Bailey Schulz
