The unemployment rate is back to pre-pandemic level, but labor participation rate is not.

July was a very important month with regard to the growth of jobs. Not only did the economy add a significant number of jobs – much more than expected – but also, we have now recovered all the jobs lost during the pandemic. The 3.5% unemployment rate is the level we were at before the pandemic hit as well. Does that mean the economic effects of the pandemic are in our rear-view mirror? Not quite.

For one thing, if there was not a pandemic, the economy would have produced several million jobs over and above the February of 2020 level during the past two-plus years. Thus, the labor participation rate is not at the level it was before the pandemic. Overall, we would expect less employment growth from here because we are fairly close to full employment levels. Ask the airline and a few other industries. It is hard to find workers right now.

As we have previously pointed out, recessions don’t happen when the economy is close to full employment. As long as we are adding jobs and consumers are spending, there is no recession – regardless of the other statistics. But as job growth slows down, we expect the economy to slow down in reaction to higher interest rates. Will the economy slow enough to make it a “no doubt” recession? That still remains to be seen.