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A recession can’t start with unemployment so low? Yes it can.

“History shows us that," says one economist.
Florida's economy is chugging along thanks to strong job growth. But don't look to a low unemployment rate as defense against a recession. (Times | 2012)
Florida's economy is chugging along thanks to strong job growth. But don't look to a low unemployment rate as defense against a recession. (Times | 2012)
Published Aug. 23, 2019
Updated Aug. 23, 2019

Low unemployment is generally seen as a positive thing, a solid indication that most of the people who want to work can find a job.

But no matter how many times talking heads say, “There can’t be a recession with unemployment so low,” don’t believe them.

There are plenty of reasons to think our record-long economic expansion will last longer, maybe a lot longer. Consumers keep spending and appear fairly confident in the future. Unlike the last time around, we haven’t binged on overpriced real estate. But don’t get seduced into thinking a low unemployment rate reduces the odds of a recession.

Here’s why: Recessions begin when the economy hits its peak and turns down. Definitions abound, but they generally include a widespread decline in economic activity that lasts at least several months. We often don’t feel a recession begin, in part because the unemployment rate remains low. It’s easier to see the downturn in retrospect, which helps explain why the National Bureau of Economic Research, the arbiter of U.S. recessions, usually announces that a recession has started months after the fact.

Take the Great Recession, which officially started in December 2007. A month earlier, the unemployment rate was a relatively low 4.7 percent, and the Dow Jones Industrial Average was still close to the all-time high set three months earlier. There were reasons for concern, but few predicted the extent of the pending collapse. Unemployment eventually hit 10 percent and the stock market plunged by more than half.

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When the 2001 recession began, unemployment was below average at 4.3 percent. At the start of the 1990 downturn, it was 5.5 percent. Before the 1969-70 recession, the rate was a paltry 3.5 percent, even lower than today’s 3.7 percent.

After a long economic expansion like the one we are in now, an unemployment rate that rises sharply over a few months indicates trouble. If it consistently moves down, the good times are likely to last. But, on its own, a low rate isn’t a bulwark against recession.

Mark Vitner, a senior economist at Wells Fargo, said the U.S. economy appears to be slowing down, but he thinks a recession is unlikely in the next year. He expects more job growth in the coming months, both in Florida and the country as a whole.

Still, he cringes when low unemployment is cited as a reason for why the economy won’t slip into a recession.

“The fact that unemployment is so low is a very positive development, but it doesn’t make a recession any less likely,” he said. “History shows us that.”

Anyone worried about a recession could keep an eye on a number of other economic indicators. Retail sales and consumer confidence are instructive, given how much of the U.S. economy relies on spending. Manufacturing, while a smaller slice of the economic pie than 50 years ago, can have an outsized impact on the economy, especially with trade tensions affecting imports and exports. A sustained spike in layoffs or the number of people filing for unemployment benefits would also portend tough times ahead.

RELATED STORY: Chances of a Florida recession are on the rise, chamber economist says.

Another one to watch is job creation, which federal officials track differently than the unemployment rate. This year, the country has created an average of 166,000 new jobs a month, a solid though unspectacular number. An average below 100,000 for several months will increase recession anxieties.

The concerns will ratchet even higher if the country starts shedding jobs. After years of growth, a single month of job losses signals an above-average chance the country is headed for — or is already in — a recession, according to data from the Bureau of Labor Statistics. Shed jobs for two consecutive months and it’s a virtual certainty.

None of this is to say that a recession is around the corner. The next one may not start for years, but a low unemployment rate doesn’t guarantee it.

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