Wharton professor Jeremy Siegel expects unemployment to spike – but says that could help the US escape a recession

• Jeremy Siegel expects a labor-market downturn to help the US economy avoid a recession.
• The Wharton professor sees more productive workers shoring up growth and corporate profit margins.
• Weaker jobs data could lead the Fed to stop hiking interest rates and end its war on inflation.

An impending slump in the US job market could be the unlikely key to escaping a recession, Jeremy Siegel has said.

“Employment has yet to soften notably, but I think the jobs data is likely to deteriorate meaningfully and quickly,” the Wharton finance professor said in his weekly commentary for WisdomTree, published on Monday.

Siegel highlighted an unexpectedly sharp decline in unit labor costs in November, according to the latest Producer Price Index (PPI) report. He attributed the drop to increased productivity and companies getting rid of excess labor. He suggested those trends could increase output in real terms, and shore up corporate profit margins against cost inflation, which would help to stave off an economic downturn.

“We’re not going to have a strong job market, but we might have stronger GDP and we might have stronger margins, and we may not have a recession,” Siegel said on the “Behind the Markets” podcast, released on Monday.

Companies shedding surplus workers could increase unemployment, which might lead the Federal Reserve to stop hiking interest rates, Siegel said. The US central bank has already lifted them from near zero in March to over 4% today in an effort to curb inflation, which has soared to 40-year highs this year.

Higher interest rates discourage spending, investing, and hiring, which alleviates upward pressure on prices. Yet they also can also lead to sweeping job losses and drag the economy into a recession.

“I think we’re going to get some negative payroll in the first half, and that is what I think is going to turn the heads of the FOMC,” Siegel said, referring to monthly employment data and the Federal Open Market Committee, which sets the central bank’s benchmark interest rate.

“If they get rid of excess labor, their main argument for the continuing increase, which is the labor market is too tight, disappears,” Siegel continued, referring to the Fed’s rationale for hiking rates in recent months.

If the Fed accepts its rate hikes have cooled the labor market and wider economy, it might decide not to hike any further, and could begin discussing a rate reduction by late spring, Siegel said.

“There is a chance we can avoid the worst of a recession — but that requires the Fed to recognize the disinflationary forces I see everywhere,” he said.