One of the most notable aspects of the new University of Michigan consumer sentiment report was the number of people who expect higher unemployment in the next year. The figure was 66% for March, up from 51% in February. In fact, the new level nearly matches the highest level during the worst part of the Great Recession in 2007/2008.
One reason the figure is surprising is that, based on BLS calculations, unemployment was 4.1% in February. For most of the last two years, the monthly rate has been 4% or lower. Economists usually describe a 5% or below rate as “full employment.” Investopedia says, “For many economists, newer understandings of full employment require some degree of unemployment to temper inflation and allow workers to move between jobs, pursue their education, or improve their skills.”
Worries about job security drive drops in consumer sentiment, which is usually accompanied by a drop in consumer spending. Consumer spending is about 70% of GDP. The cycle often drags the economy into recession: Worry about jobs, then lower sentiment, then lower spending, and then higher unemployment, which drives worries about jobs.
There is a pitched debate about the chance of a recession in the year’s second half. Goldman Sachs puts the rate at 20% in the next 12 months. Deutsche Bank puts it closer to 50/50. A rising stock market and home prices have made Americans wealthier in the last four years. However, the market has been shaky recently. A stock market correction of 20% (as happened in 2022) will make some investors panic.
People anxious about employment can cripple an economy. That may be about to happen.
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