Editor’s Note: Gad Levanon is the chief economist on the Burning Glass Institute. He’s the previous head of The Conference Board’s Labor Market Institute. The opinions expressed on this commentary are his personal.
To many economists and analysts, the US economic system has represented a paradox this yr. On the one hand, GDP progress has slowed considerably, and a few argue, even entered a recession. On the opposite hand, general employment progress has been a lot stronger than regular.
While GDP declined at an annualized fee of 1.1% within the first half of 2022, the US economic system added 2.3 million jobs within the final six months, way over in another six-month interval within the 20 years previous to the pandemic.
This tight labor market – and the speedy wage progress it has spurred – is inflicting inflation to change into extra entrenched. The Consumer Price Index, which measures a basket of products and providers, was 8.3% year-over-year in August. That’s decrease than the 40-year excessive of 9.1% in June, however nonetheless painfully excessive. To handle it, the Federal Reserve is more likely to drive the economic system right into a recession in 2023, crushing continued job progress.
Why has employment progress remained so sturdy? First, the US economic system is holding on higher than many anticipated. The Atlanta Fed’s GDPNow estimate for actual GDP progress within the third quarter of 2022 is 2.3%, suggesting that whereas the economic system is now rising far more slowly than it did final yr, we’re nonetheless not in a recession. When the demand for items and providers strengthens, so does the demand for employees producing these items and providers.
Second, regardless of the slowing of the economic system and the rising fears of recession, layoffs are nonetheless traditionally low. Initial claims for unemployment insurance coverage, an indicator extremely correlated with layoffs, had been 219,000 for the week ended October 1 – greater than the week prior, however nonetheless one of many lowest readings in latest many years. After years of more and more traumatic labor shortages, many employers are reluctant to considerably scale back the variety of employees whilst their companies are slowing. That’s as a result of corporations are nervous that they may have hassle recruiting new employees after they begin increasing once more.
Third, many industries are rising sooner than regular as a result of they’re nonetheless recovering from the pandemic. Convention and commerce present organizers, automotive rental corporations, nursing properties and youngster day care providers, amongst others, are all rising quick as a result of they’re nonetheless effectively under pre-pandemic employment ranges.
Fourth, simply as some industries are rising as a result of they’re nonetheless catching up, others are experiencing excessive progress as they regulate to a brand new regular of upper demand. Demand for information processing and internet hosting providers, semiconductor manufacturing, psychological well being providers, testing laboratories, medical tools and pharmaceutical manufacturing is greater than earlier than the pandemic. And it’s doubtless that these characterize structural adjustments to purchasing patterns that can preserve demand excessive.
Fifth, in the course of the pandemic, company investments in software program and R&D reached unprecedented ranges, which drove a speedy improve in new STEM jobs. Because these employees are particularly effectively paid, they’ve had loads of disposable earnings to spend on items and providers, which has supported job progress all through the economic system.
These components are spurring optimistic momentum that won’t disappear in a single day. Employment progress is more likely to decelerate from its traditionally excessive charges, however it is going to nonetheless stay stable within the coming months. ManpowerGroup’s Employment Outlook Survey exhibits that the hiring intentions for the fourth quarter are nonetheless very excessive, regardless of dropping from the earlier quarter.
Next yr, nevertheless, will look very totally different. Many of the industries which might be nonetheless recovering from the pandemic can have reached pre-pandemic employment ranges. With demand saturated, these industries could revert to slower hiring. But this alone is unlikely to push job progress into unfavorable territory. What will do that’s financial coverage.
There are two methods to rein within the labor market: Either scale back demand for employees or improve the labor provide. But it’s exhausting to engineer a lift in labor provide. That takes the sort of legislative motion wanted to extend immigration, drive folks into the labor pressure or develop funding in workforce coaching. This is more likely to show elusive in in the present day’s polarized political surroundings.
The solely possibility that leaves the Fed is to engineer a recession by persevering with to boost rates of interest. Expect to see that occur in 2023.