Unemployment Top Threat to Soft Landing, Krugman Says

Estimated read time 2 min read

The US economy is comfortably in soft landing territory, but Paul Krugman says it isn’t altogether clear that it will stay that way. In an op-ed for the New York Times, the famed Nobel laureate highlighted an unexpected uptick in unemployment as reason for concern.

He’s focused on a recession indicator known as the Sahm Rule model, which says that when the unemployment rate’s three-month moving average climbs 50 basis points from a 12-month low, the economy is in the first stages of a downturn.

“It’s still below that critical 0.5 level, but I am worried that high interest rates may finally be taking their toll and that by keeping rates high, the Fed is running the risk of finally making all those wrong recession calls come true,” Krugman wrote on Tuesday.

February’s jobs report triggered these concerns, as the unemployment rate unexpectedly rose to 3.9% from 3.7%. This hotter-than-expected reading stressed other analysts as well, who voiced worries of a surprise recession.

“Now that the jobless rate is up 0.5 of a percentage point from the January 2023 cycle low, it messes up the soft landing narrative because once it rises this much from the lows, the recession nobody ever sees coming arrives,” economist David Rosenberg wrote last week.

Krugman notes that on other fronts, however, soft landing advocates have a stronger case.

While consumer price index inflation data has outpaced expectations two months in a row now, these recent reports are not completely in line with reality, Krugman wrote.

For instance, where core inflation rose 3.8% on an annual basis, this measure is more of a snapshot of the past, he said. That’s as it’s largely driven by shelter prices, which tend to lag in official measures.

Instead, when volatile items such as food, energy, used cars, and shelter are excluded, the six-month change in consumer prices has risen at a more modest 2.8% annual rate.

“Eventually something will go wrong, because something always does,” Krugman forecast. “But compared with the dire predictions of many economists, not to mention political critics of the Biden administration, we’re still in incredibly good shape.”