This is not what a recession looks like.
For the last couple of months, the oil crash, the stock market sell-off, and most of all the slowdown in China have made people wonder whether our economy is not quite as strong as it seems. And to be fair, there are real reasons to worry. The dollar has gone up so much, more than 20 percent in just the last 18 months, that it's as if the Federal Reserve had raised rates 0.75 percentage points in addition to the 0.25 it did in December. Not only that, but factory orders have been pretty weak, and that might even be spreading to the service sector.
But despite all that, our little recovery that could still seems to be chugging along just fine, thank you very much. The economy added 242,000 jobs in February, another 30,000 in revisions to previous months, and the only reason the unemployment rate didn't fall from its already low level of 4.9 percent is that so many more people started looking for work. That last part is the best news of all. Consider this: in the last 12 months, the share of adults who do have a job has gone up from 59.3 to 59.8 percent. Now, that might not sound like a lot, but it is. Keep in mind that this number includes college kids and senior citizens among its ranks of people without a job. If we just look at it for people between 25 and 54 years old—who, for the most part, should be too old to be in school, but too young to be retired—it's also increased from 77.2 to 77.8 percent. That's still well below the 80 percent or so it was before the Great Recession hit, but it's getting there. Slowly and surely.
Indeed, as you can see below, the economy has still been adding an average of 228,000 jobs a month for the last three. That's a little slower than it was at the end of 2014—before the stronger dollar kept us from breaking out—but it's not really a slowdown, let alone a recession. It's just the same recovery we've grown to know and, well, maybe not love, but at least not hate the last seven years.
The only un-silver lining is that wages still aren't rising very much. They actually fell a bit in February, although, as economist Ian Shepherdson points out, that was probably something of a statistical fluke. But that doesn't really change the bigger picture: wages are up just 2.2 percent the past year, which is about as much as they have been the entire recovery. That tells us that even though unemployment looks like it's back to normal, the labor market isn't. Why is that? Well, if there weren't many people who want jobs but don't have them, companies would have to fight over them by offering higher pay. So the fact that this is not happening tells us that there must still be a fair amount of slack left from what Fed Chair Janet Yellen calls "shadow unemployment." Those are people who want full-time work but can either only find part-time jobs or have given up looking for now—and they're starting to come back now.
That leaves the Fed in the same spot it's been for the last year or so. On the one hand, it doesn't need to raise rates since wage growth is low and inflation is lower still. And in fact, it probably shouldn't. Even though the recovery does seem to be on track, the consequences of it getting derailed would be far, far worse than the ones of inflation getting higher than 2 percent. That's because the Fed really can't cut rates if things get bad—Europe and Japan show that they can go into negative territory, but only slightly so—but it can always raise them as much as it needs to. But, on the other, things are good enough that the Fed can make a case for more hikes if it wants to, and it does. What does that mean? Well, as long as the jobs picture stays about the same, the Fed could raise rates another 0.25 percentage points as soon as April, but more likely in June.
The recovery is almost over the mountain.