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Jun 22, 2022
This article is part of a series called The Labor Market.

The latest month’s job report still showed strong job gains, but concerns about a slowdown are mounting.

Based on figures recently reported by the U.S. Bureau of Labor Statistics, the economy added 390,000 jobs in May. While the number checked in below the average of 540,000 jobs added per month since January 2021, the job gains were still very robust compared to historic norms. The U.S. added more than 6.5 million jobs in the past 12 months, a growth rate of 4.5%.

How Severe Will the Storm Be?

Several of the key monthly indicators still show the job market is hot, but it feels as if the storm that has been brewing on the horizon is getting closer by the day. How severe it will be is still unknown.

The base-case assumption heading into 2022 was that the pace of job growth would start to slow to something more sustainable as we progress through the year. A pace of approximately 300,000 jobs added per month was the expectation. Because job gains exceeded that pace in the first few months of this year, the labor market only needs to add approximately 165,000 jobs per month the rest of the year to achieve that average. 

Remember, we have been at a pace of historic job gains — nearly 2.5 times pre-pandemic norms — but the talent pool wasn’t growing to keep pace with hiring demand. If job growth starts to fade in the next few months, don’t let the headlines scare you without getting more context. The job market was likely going to show more moderate growth in the back half of the year due to a shortage of available talent. 

That said, multiple factors weigh on the outlook, some of which could cause a sharper decline in the near-term. The war in Ukraine is still ongoing despite how much it seems to have faded from the headlines in our country. Spikes in virus counts and new variants were the main disruptors the past two years and could still impact the economy even as mandates continue to be lifted. 

The Impact of Inflation and Interest Rates

Now, most of us are experiencing real inflation for the first time in our adult lives. The thing that slows the economy can often be unpredictable, but this one is staring us in the face. 

The consumer price index grew at 8.6% on an annualized basis in May. It’s one of the key measures of inflation, and the reading was at its highest rate since December 1981. Consider, roughly three-quarters of today’s U.S. population either wasn’t born or were younger than 18 years of age at the end of 1981. 

The University of Michigan has been collecting consumer sentiment data since November 1952, and June’s initial reading of 50.2 was the lowest it has ever recorded. Inflation was the main factor for the decline in sentiment, especially related to gas prices. 

The producer price index, which measures how much it costs business to acquire the goods necessary to produce their products, grew at 10.8% in May. In response to the various measures, the Federal Reserve raised interest rates by 0.75% in an attempt to slow inflation.

Even though many consumers have seen a substantial pay increase during the last 12-18 months, not all of them have. Prices have increased faster than people’s incomes and consumers simply cannot buy as many things as they could a year ago. On top of that, credit just got more expensive. Have you checked out mortgage rates lately? 

A lower volume of purchases means businesses do not need to produce as many goods, which then equates to fewer people needed at their factories or offices. In addition, businesses’ cost of capital has increased, and they’ll need to look for ways to be more efficient with money. With salaries often representing one of the largest costs on most businesses’ balance sheets, companies may be looking to cut back on hiring. The pace of new jobs added to the market will have to slow, but how much and for how long will be the question. 

Reminder, we already knew things would have to slow one way or another because the job market has expanded at an unsustainable pace during the pandemic recovery. 

Some companies will be less aggressive in adding new roles, some will delay backfilling vacated roles, and some will cut jobs as we already see happening. Remember, layoffs have been at an all-time low so it shouldn’t be shocking to see this start to occur again. Businesses will be hiring again at some point soon. There tends to be companies or industries that thrive even as the market softens, but it can vary depending on what is causing the change in the economy.

Some of the early signs of this change are visible, but we haven’t seen a massive wave yet. Over the past few weeks, the topic of media interviews I’ve participated in have changed considerably. For instance, it has gone from “how do I keep up with pay for tech talent?” to “why are some companies rescinding offers or implementing hiring freezes?” Now, these reporting outlets are always trying to be on the front edge of a trend that is turning, and some of the early indicators never develop past an example or two. Still, there seems to be more smoke developing. 

The Silver Lining Around Fewer Job Openings

Companies that over-hired or stretched too far on compensation will be some of the first to implement hiring freezes or start terminations. So many of these labor market columns over the past year have featured commentary about the record number of job openings, which was still at 11.4 million as of the latest count. I expect the job openings numbers will start to moderate closer to something normal. Indeed, in the two years before the pandemic, the average was just over 7 million jobs open per month. 

Fewer open jobs should mean recruiters aren’t spread so thin going after the same dwindling talent pool. What does it mean when you have twice as many jobs open as the number of people to fill them? A lot of unsuccessful searches. 

For hiring managers, that could mean your people are less likely to be poached. How great will that be when you aren’t dreading every time an employee asks to have a quick, private conversation? As job openings moderate, the number of monthly quits should also recede from historic levels. April’s voluntary quits totaled 4.4 million, just below the record of 4.5 million in November 2021. At an annualized rate, voluntary turnover is at approximately 35% at the national level, and some industries, such as hospitality, are even more elevated. 

Fewer job openings also means the hiring process might not be as competitive, but a candidate’s appetite for a new job might be different during an economic slowdown.

Fewer job openings and lower turnover should also result in wage growth normalizing. Annual wage growth is forecast to moderate back to 2.5% by the end of 2023. Some locations, industries, and occupations have been in double-digit growth. We are in our normal forecast review cycle now, and the brakes could be applied harder and faster depending on how things play out in the next few months. 

Now, for the good news. As mentioned, turnover rates should start to decline and make the hiring process easier for managers, allowing for more time to work on the business itself. The market will shift from an employee’s market back towards an employer’s market, or at least somewhere in the middle. Businesses that had a tough time competing for talent will have a better opportunity to win candidates…if they still have the budget.

This article is part of a series called The Labor Market.
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