AYESHA RASCOE, HOST:

How is the economy doing? It’s a question that many of us are asking, given all of the uncertainty created by President Trump’s tariffs. Should we spend money or tighten our belts? The answer to that could well determine whether we go into recession or not. Claudia Sahm has made a career of deciphering economic data. She served in the Obama administration and is now the chief economist for New Century Advisors. Welcome to the program.

CLAUDIA SAHM: Thank you. Happy to be here.

RASCOE: So I want to start with the May jobs report that just came out. Employers added 139,000 jobs. What should we make of those figures?

SAHM: Well, we should look big picture. What we can see is the labor market is cooling off. It’s slowing but very gradually, and that is important. So the 139,000 jobs - that’s still a respectable addition in terms of jobs. It’s less than what we saw before the pandemic. It’s less than we’ve seen in recent years when the labor market was really firing on all cylinders. And yet, we are pointed in a direction of further slowing.

RASCOE: But is that a good thing? - 'cause there was all that time when we were worried about inflation, where they were like, the jobs - it’s too hot. It’s too hot. And so...

SAHM: (Laughter).

RASCOE: ...Is this, like, what we wanted? - 'cause I get confused.

SAHM: Yeah, you can never make economists happy.

RASCOE: (Laughter) Yeah.

SAHM: And it’s true. And I do think about, you know, two, three years ago, all the discussion was a recession is going to happen. You know, inflation’s high. The Fed’s raising interest rates. We just - we have to have a recession. That always happens. But we had an extraordinarily strong labor market. And that may have been causing some trouble for, say, businesses that had to keep raising wages, but it meant that people had more money in their pocket to pay those higher prices. It meant they still had job opportunities, and they were moving around. It came with some issues in terms of maybe inflation. But frankly, the labor market right now is in an OK place, but it is nothing like the buffer that we had in 2022.

RASCOE: And so what are the cracks that you’re seeing in the wider economy?

SAHM: A crack that’s been with us now for several months is we’ve seen the hiring rate. You know, employers bringing on and creating jobs is unusually low. Now, the good news is the layoff rate is really low. So we’re in this labor market where if you have a job, you’re really in pretty good shape. If you’re looking for a job - maybe you got laid off or maybe you’re coming straight out of school - like, this is a tough labor market. If we have businesses starting to do more and more layoffs, we’re putting workers out into an environment where there hasn’t been a lot of hiring going on. And so then you can have the unemployment rate start moving up really quickly.

RASCOE: It seems like we have not seen the full impact of President Trump’s tariff policy yet. Should we expect to see more, or is it not playing out the way people were worried that it might?

SAHM: Right, so the effects are still coming. It’s been a whirlwind of policy announcements. We think about that. We think about what are the eventual effects of that, and you’ve seen a lot of reactions and business surveys, household surveys. But then for the policies to actually work their way through the economy takes time. Tariffs are a cost. Businesses have to decide, what do we do with this cost? Will we give it to consumers? Well, then the consumers are going to have less money. They may not be spending as much. Do we take it to our shareholders with less profits, or do we cut back on, you know, how much our workforce is?

The unemployment rate is an example. It often peaks after the recession is over, right? So it really, like, takes time to get all the way to the labor market. We’re not at a real kind of crisis point in the labor market. But given how recent these policy changes are, we shouldn’t have expected to be there quite yet.

RASCOE: Elon Musk, the former presidential adviser, who’s now had this fallout with President Trump - he warned that tariffs will cause a recession later this year. What is your take on that?

SAHM: A recession at this point isn’t my base case. I strongly anticipate that we see the economy slowing down and the unemployment rate drifting up and not as many job opportunities out there. And I think we’re headed towards slowing, and we are headed towards inflation moving back up. That reality is a problem, even if we avoid a recession. The case for the recession is we’ve had a lot of uncertainty. We’ve had a lot of twists and turns in the policymaking, and the tariffs are just one example. But at this point, it’s too early to tell.

RASCOE: That’s Claudia Sahm, the chief economist for New Century Advisors. Thank you so much for joining us.

SAHM: Thank you. Transcript provided by NPR, Copyright NPR.