A (Mostly) Positive Labor Market Forecast for 2023

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

The year is closing with another strong employment report from the U.S. Bureau of Labor Statistics. For November, the U.S. economy added 263,000 jobs, and the unemployment rate remained very low at 3.7%. Despite the constant anticipation of more negative news, along with many high-profile layoffs, the U.S. labor market has displayed very few signs of a major slowdown. 

Hiring (and Turnover) Will Moderate in 2023

Still, some of the underlying numbers do show that some of the movement in the labor market is down from peak levels we saw earlier in the year. Job openings remain elevated at 10.3 million based on the latest reading, but that is down from almost 11.9 million from March. For context, the monthly average job openings in 2019 was 7.2 million. 

Fewer job openings should relate to fewer searches to fill roles, which ultimately causes the amount of hiring to moderate as well. In October, hiring totaled just over 6 million for the month, which was down from more than 6.8 million in February, a 12% drop in volume. 

A big theme we were predicting for 2023 is that many of these types of indicators would go back to more normal levels, and the hiring volume in October 2022 was almost identical to February 2020, right before the pandemic hit. 

From a hiring manager’s standpoint, those trends may bring a sigh of relief. Lower levels of job openings and hires also means lower turnover as people leave one role for another. The latest monthly total of voluntary quits was 4 million, the lowest since May 2021. Annualizing the monthly pace of voluntary turnover shows the figure declined from 36% at the end of 2021 to 31.2% in October 2022. It is roughly halfway back to the February 2020 rate of 27.6%. 

While fewer people voluntarily resigning is good news for hiring managers, it also means recruiters are having a harder time pulling people away from their current jobs. 

Some Industries Feeling Pain, Others on the Upswing

Interest rate increases continue to take a toll on the housing market. According to the National Association of Realtors (NAR), home sales declined for the ninth consecutive month in November. This represents the longest negative streak NAR has ever recorded, even compared to the Great Recession, which was sparked by a housing bubble and collapse of the mortgage industry. 

While overall job gains have remained in positive territory throughout 2022, there are types of businesses that have taken a step in the other direction, many of which relate to housing. Building-material supply stores, insurance carriers, real-estate appraisal, and furniture and home stores are among industry subsectors that have fewer employees today than when the year began. Those sectors saw employment decline by nearly 5% or more in 2022.

On the flipside, the following industries increased employment by 10% or more in 2022: convention and trade show organizers, hotels, men’s clothing stores, and taxi and limo services. These were all industries that were impacted severely when our social behaviors changed during the pandemic. 

So far, there’s been enough demand out there that even though layoffs have occurred, we haven’t seen a big impact on the unemployment rate or unemployment claims. Meaning, those people who have lost their jobs have likely landed new roles. If you do have open roles going into 2023, the industries impacted by layoffs and interest rate hikes could be a good source of talent.

Inflation Eases, but Still Has a Way to Go

The consumer price index (CPI) registered a 7.1% annual increase in November, the lowest since December 2021. While that number is still more than triple the rate compared to the few years before the pandemic, it is down significantly from the peak of 9.1% in June.   

Of items that helped lower the CPI in recent months, energy and food are two expenses that have come down relative to mid-summer. Travel-related expenses eased in November, and used car prices have been on a steady decline for months. 

The slowing of price growth for goods and services should put less pressure on employees to maintain their monthly expense budgets, which could also impact how many employees are actively looking to switch jobs. As job openings, hires, and voluntary quits moderate, it should help ease wage inflation. 

Even though there are signs that overall inflation is cooling, the Fed is not finished raising interest rates. Since last month’s column, the Fed raised interest rates another 0.5 percentage points — but still lower than the 0.75 points that we’ve seen in their last several meetings — and signaled more increases could be in store in 2023. December’s increase was the seventh increase of the year, and it resulted in a total interest rate hike of 4.25 percentage points since the beginning of 2022. 

Mortgage rates, credit-card premiums, and car loans are among the items that have been impacted by these increases, which ultimately cools demand for the goods and services businesses provide to consumers. The cost of capital for businesses has also increased, which impacts plans from capital investments to headcount budgets. 

2023 Brings Labor Market Normalization

We’ve become accustomed to whiplash when it comes to news about the labor market and economy. 2022 closes out as one of the strongest years for hiring on record, but some sectors have lost jobs, and there is a lot of uncertainty going into 2023. 

Nonetheless, next year looks to be one of normalization for most industries and sectors. LaborIQ projects 64 million hires, so businesses need to think about retaining talent and positioning their teams to weather a downturn. 

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