Recession Red Herring? Why This Reliable Job Market Indicator's Warning Could Be A False Alarm This Time

As economists debate the possibility of an impending recession, a key metric is catching their attention as a potential warning sign.

What Happened: Since the 1950s, the change in the average number of hours worked by people has often preceded recessions, according to a Wall Street Journal video report. This metric has historically dropped before most recessions.

The average number of hours worked each week has now decreased from elevated levels to those seen in 2019 or even lower, leading economists to believe that the U.S. may be heading for a recession.

Hours worked is a crucial indicator as businesses are more likely to adjust hours before making hiring or layoff decisions, making it a signal of changes in overall economic activity, the Journal explained.

When consumers spend less, companies may respond by cutting hours if they have the flexibility to do so. The report cited the manufacturing industry in the 1980s, where cutting hours was a consistent leading indicator of an economic downturn.

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False Alarm? Despite the metric’s historical reliability, some economists are cautiously optimistic about the economy’s resilience this time around. They attribute the unusual post-pandemic factors in the private sector as a potential reason for the change.

Industries such as manufacturing, transportation, construction, retail, and hospitality have seen declines in working hours, bringing the overall average down to about 34 hours in May from a peak of 35 hours in January 2021.

While growth has slowed and some employers have reduced hours, it is hard to argue that the economy is currently struggling, according to the report.

Employers are making interesting moves, adding workers even during layoffs. In June, the number of part-time workers looking for full-time positions increased by 452,000, the largest increase in three years. Some employers are choosing to hold onto their workforce, adjusting hours to weather tough times.

“The hours worked indicator may defy history,” the report noted, adding that “the decline we’re seeing right now is maybe not as ominous as it would normally be.”

Photo by Quality Stock Arts on Shutterstock

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