Bad Economic News Is Piling Up. A Recession Is Looking Imminent

Economic data rarely tells a clean story. One report points to strength, while the next hints at trouble. Inflation is a perfect example. The May Consumer Price Index jumped to 4.2%, yet core inflation — which strips out volatile food and energy costs — has remained far more manageable. The same pattern appeared in producer prices. Headline PPI soared to 6.5%, but core PPI came in well below forecasts because much of the increase was driven by energy costs rather than broad-based inflation pressures.

The labor market may now be sending a similar mixed message. On the surface, everything looks fine. Dig deeper, though, and the picture becomes less reassuring.

The Government Jobs Report Says the Economy Is Holding Up

The Bureau of Labor Statistics reported that the U.S. economy added 172,000 jobs in May, roughly double economists’ expectations. The unemployment rate held steady at 4.3%, suggesting employers are still hiring despite higher interest rates and slowing economic growth.

Those are not recessionary numbers. In fact, many investors viewed the report as evidence that the economy remains resilient. A labor market creating jobs at that pace typically does not signal an imminent downturn.

That said, employment data has always been a lagging indicator. Businesses often continue hiring long after economic conditions begin deteriorating. By the time payroll growth turns negative, a recession is frequently already underway. That’s why smart investors look beyond the headline figures.

Small Businesses Are Sending a Different Signal

The National Federation of Independent Business (NFIB) released two May reports that paint a much weaker picture of the labor market.

The NFIB May Jobs Report found:

The 29% reading for unfilled job openings was the lowest since May 2020. More concerning, a net 9% of owners plan to create jobs over the next three months, also the lowest level since May 2020.

Meanwhile, labor costs became the single most important problem for 14% of small business owners, the highest reading in the survey’s history. NFIB Chief Economist Bill Dunkelberg noted that many firms are dealing with rising labor expenses while also navigating new state-level wage mandates and other employment-related costs.

Those pressures matter because small businesses account for roughly 46% of all private-sector employment in the U.S.. When Main Street starts pulling back, the broader labor market often follows.

A Leading Indicator Is Flashing Red

The most concerning development comes from economists at Pantheon Macroeconomics.

After stripping out residual seasonality from the NFIB data, Pantheon found that only 9% of small business owners planned to hire over the next three months. Excluding the pandemic-driven collapse in 2020, that is the weakest reading in a decade.

More importantly, small-business hiring plans have historically led private payroll growth by roughly four months. In other words, this is not simply a snapshot of today’s economy. It is a glimpse of where employment could be headed by late summer or early fall.

The trend has been deteriorating for six consecutive months. If the historical relationship holds, private payroll growth could turn negative as early as the third quarter.

When small firms stop planning to hire, the real economy is speaking before the headline jobs report catches up.

Key Takeaway

In short, the labor market may not be as healthy as the latest government jobs report suggests. The BLS data shows a red-hot jobs market, yet the NFIB’s May surveys show hiring plans at their weakest level since 2020, labor costs at record highs, optimism below its 52-year average, and uncertainty climbing further above historical norms.

Granted, one report does not guarantee a recession. But as more data points pile up, the situation becomes ominous. And small businesses sit at the heart of the U.S. economy. When nearly half of private-sector employers start pulling back simultaneously, investors should pay attention.

Perhaps the one silver lining is that a weakening labor market could give the Federal Reserve room to cut interest rates — or at least remove the risk of further rate hikes.

Regardless, the message from Main Street is becoming harder to ignore. The headline jobs numbers still look healthy. The underlying trends suggest the economy may be much closer to recession than investors realize.