FOLLOW US

A significant slump in the US job market could be the unlikely key to dodging 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 plunge in unit labor costs in November, according to the latest Producer Price Index (PPI) report. He said the drop is caused by increased productivity and companies getting rid of excess labor. 

"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 cutting off surplus workers could push unemployment higher, which might lead the Federal Reserve to stop increasing interest rates, Siegel said. The US central bank has already brought them from near zero in March to over 4% today in an effort to tame inflation, which has skyrocketed to 40-year highs this year.

Higher interest rates discourage spending, investing, and hiring, which alleviates upward pressure on prices. Yet they can also lead to total job losses and pushes 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.