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Is Jerome Powell wrong about the labor market as much as he is about inflation?

Now we know. The economy has actually contracted for two consecutive quarters, falling a modest 0.9% in the second three months of the year after falling 1.6% in the first quarter.

That doesn’t mean, says the White House, in a ridiculous effort to spread bad news, that we’re in a recession. No father; it just means that, well, we had two low quarters (which historically has always meant a recession).

That the White House is taking this approach of burying its head in the sand is understandable. President Biden has assumed the Oval Office amid a dynamic and broad recovery; damaging policies like his war on fossil fuels and excessive federal spending have now spurred inflation and set our growth on fire.

But it was Federal Reserve Chairman Jerome Powell’s comments the day before the GDP release that caught our attention and sounded the alarm. Powell, answering questions from reporters following a 75 basis point rate hike, also balked when asked if the United States was in a recession.

No, he said, “I don’t think the United States is currently in a recession. And the reason is that there are simply too many sectors of the economy that are working too well. I would mention in particular the labor market.

Which makes you wonder if Powell reads the news.

Yes, the labor market has been strong, but all indications are that we are at an inflection point and the next direction is down.

Over the past three months, there has been a slow but steady increase in the number of companies that have slowed down or stopped hiring. There were also quite a few who announced the departure of the workers. Remember: layoffs were virtually non-existent just six months ago. Employers struggled to find workers; few dared to diminish their ranks.

That changed, albeit slowly. There is no doubt that it is still difficult to find qualified employees. Over the past year, as millions have retired and millions more have refused to return to work, in part because they were propped up by overly generous federal and state benefits, managers rushed everywhere to add staff.

Today, the panic is over. Recent polls from groups like the National Federation of Independent Business show that inflation, not job cuts, is the biggest problem for small businesses. In a recent survey, almost a third of small employers said that to offset rising prices, they cut employee-related costs like compensation, hours worked or… the number of employees.

Weakening demand in various sectors led companies to suspend hiring and lay off employees. E-commerce companies like car dealerships Carvana and Vroom, which have seen demand soar during the pandemic and since the gas drop, have laid off people.

Compass, an online real estate powerhouse, has cut its workforce by about 10%, adjusting to an environment of higher mortgage rates. GoPuff, a grocery delivery app, is also downsizing. Other companies that have benefited from a lockdown environment, like Pelaton and Netflix, have also laid off people.

Big Tech is also reacting to a possible drop in demand, with Twitter, Apple and Alphabet all announcing a slowdown in hiring. Meta, reacting just recently to a decline in revenue, said it would downsize; Amazon said it was overstaffed in some warehouses and Shopify laid off 10% of its workforce.

Tech companies aren’t the only ones laying off workers. Ford Motor Company announced plans to lay off up to 8,000 workers, General Motors, which had prepared to welcome 1 million job applications as it prepared to produce electric vehicles, has now instituted a freeze hirings.

In biotechnology, the news is similar. Invitae announced it would be laying off 1,000 employees and CytomX Therapeutics, a San Francisco-based company working on cancer treatments, is cutting its workforce by 40%.

On Wall Street, what was only a few months ago, a hiring frenzy has definitely cooled. Goldman Sachs, whose revenue fell 23% last quarter, said it would slow hiring and restore annual performance reviews. Black Rock said it would cut hiring and Morgan Stanley said layoffs were on the table if business conditions deteriorate.

So where does Powell see this extremely tight job market? In the rear view mirror. Job gains have been strong, sure, but they’re now down. In June, the United States added 372,000 healthy jobs. But that was down from 384,000 in May, 714,000 in February and 504,000 in January.

Meanwhile, the four-week moving average of jobless claims has trended higher. Claims last week surprised economists by jumping to the highest level since last November. Continuing complaints are also increasing.

The Federal Reserve System, with its $5 billion budget and tens of thousands of employees, is supposed to be ahead of the times, not behind. This Fed has been spectacularly late in anticipating and diagnosing inflationary pressures, and even slower in reacting to soaring prices. The Fed missed many red flags, including that consumers were flush with government largesse and buoyed by rising stock and home prices.

Certainly the pandemic has turned all economic calculations and expectations upside down. And it’s true that seeing GDP growth turn negative while hiring is still positive is unusual. Leading economist Ed Hyman, who didn’t predict a recession, acknowledged the odd mix of data, concluding, “We’ve never seen anything like it.”

But now the Fed needs to tune in to what’s happening in the real world — and in particular how its efforts to crush inflation can weaken not just demand but also labor markets.

It’s good news that Powell indicated flexibility going forward and, as usual, indicated that the Fed would be guided by data.

Otherwise, it could drive that country’s economy straight into a ditch. The recent record is not encouraging.

Liz Peek is a former associate of the large Wall Street firm Wertheim & Company. Follow her on Twitter @lizpeek.

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