Job Markets Like This Lead to Recession, Summers Says

That’s how much of the time the modern-era economy has fallen into recession when jobs have been this plentiful and pay increases have been this hot, according to a new research paper by an influential economist.

Since 1955, every time average quarterly wage inflation (or growth) has been above 5% at the same time as average quarterly unemployment was under 5%, the economy has gone into a recession within two years, according to a paper published Monday by Harvard University economists Lawrence Summers, a former Treasury secretary, and Alex Domash.

Both of those conditions have been met since the fourth quarter of 2021, the economists said, suggesting there’s a “significant economic slowdown” (they stopped short of directly saying recession) ahead if history is any guide.

Workers are in such intense demand these days that the higher wages they’re getting may drive consumer prices up further, even as that same price inflation erodes the buying power of their paychecks, the economists said. (Wage growth was the strongest it’s been in 40 years, according to a three-month moving average taken in February.)

The Federal Reserve has been trying to bring this inflation under control by raising its benchmark interest rate to discourage borrowing and spending, but it’s unlikely the central bank will be able to accomplish this without triggering the slowdown, the economists predicted.

Powell himself has admitted it will be a challenge to achieve a “soft landing,” where the Fed raises the benchmark interest rate without causing a recession, though it will succeed according to the latest projections from the central bank.In mid-March, Fed officials forecast that their favored measure of inflation would cool to 2.7% in 2023 (it was 6.4% in February) and that unemployment would stay low at 3.5%.   

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