eli5: Why are they telling me that there’s a recession coming when unemployment is low at 3.6 or .9 percent as of this last month?

Question

What the title says.

In: 0

Answer 1

Low unemployment is actually a leading indicator of recessions – i.e. whenever you see a persistently low unemployment, ‌you’re likely to get a recession soon.

So in a perverted way, very low unemployment is potentially BAD for the economy. This is how it all snowballs:

**Step 1:**

Almost everyone is employed => people have money => people spend more.

When people spend a lot more than normal (because a lot more of them are employed) to then prices of things go up (e.g., people are willing to spend more for the same house pushing its price up). In this way, inflation rises.

**Step 2:**

Inflation rising is not good and eventually the Fed takes action. The Federal reserve tightens the money strings by raising interest rates. This raise typically means that both people and companies start spending LESS now… Because loans get expensive.

Take this far enough and it crashes the economy as everyone reduces spending. Less spending => slower or negative economic growth.

So in a weird way, low unemployment portends all these follow-on effects, and therefore predicts an upcoming recession.