Layoffs and Inflation Show Signs of Slowing, Job Creation Continues

The labor market beat the odds in the first half of the year. What's in store for the second half?

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Jul 20, 2023

The start to summer 2023 has been filled with reports of slowing inflation, fewer layoffs, and a labor market that is still strong, but normalizing. Let’s start with the latest jobs reports.

There were two very different reports of job gains for June, but even the more moderate figures point to continued strength in the labor market. ADP reported 497,000 jobs were added in June. But that number felt far too high given all we read and hear related to layoffs and hiring freezes.

The U.S. Bureau of Labor Statistics (BLS) had a much more conservative, but still strong, reading, at 209,000 jobs added for June. If I had to place a bet on which one was more accurate, I’d hedge towards the BLS number. If job gains can hold near that pace of 150,000 to 200,000 per month, 2023 will still go down as one of the strongest labor markets on record.

One note about June’s report from BLS is that job gains for the two prior months were revised down by 110,000. These revisions brought labor market sentiment in line with the numbers, which show slower but steady growth overall but pain in some industries.

Month after month, the BLS report was exceeding economists’ expectations, so the lower figures make sense. Even with the downward revisions, the labor market has added close to 1.7 million jobs in the first half of the year.

Layoffs Have Started to Slow

There will continue to be news of layoffs, but it is possible the worst could be behind us, at least for the time being.

A couple months ago, I wrote at length about how to interpret unemployment insurance claims. Initial unemployment insurance claims, which give an indication of new layoffs, have trended lower in recent weeks after peaking in mid-June. While initial unemployment claims did spike in June, the good news is that there has been no further acceleration; but I’d prefer to see the downward trend continue for several more weeks to be really meaningful.

Continued unemployment insurance claims give a sense of whether people can find work quickly after becoming unemployed. That number peaked at 1.86 million in early April and since then has declined in eight of the past 12 weeks. The latest reported total was 1.73 million. That decline in continuing claims suggests a combination of people finding work more quickly and layoff volumes leveling off or beginning to decline.

Both types of unemployment insurance claims are moving in the right direction, and that is great news. Other data sources also point to lower levels of layoffs or involuntary turnover.

BLS data for May show just under 1.6 million monthly layoffs, down from the peak of more than 1.8 million in March. May’s layoffs were the lowest monthly total of the year., which focuses on tech layoffs, reported just under 11,000 tech workers lost their jobs in June. For comparison, January’s total was almost 90,000. February and March averaged 39,000, and the figures dropped significantly in the second quarter.

If you dig deeper into industry trends for the Bay Area, it appears some tech companies could be stabilizing and starting back to a more normal pace of expansion. That shouldn’t be a surprise with all the news surrounding AI.

Why the Job Market Doesn’t Feel the Same for All Candidates

While the layoff totals appear to be down, the job market likely does not look and feel the same as it did over the past couple years. I’ve seen plenty of job seekers post on LinkedIn that remote or hybrid work is becoming harder to find. Stats from Indeed corroborate that trend.

Approximately 8.4% of jobs posted on Indeed offer either fully remote or hybrid work based on the latest report. That’s down from more than 10% of jobs in early 2022 when there were also fewer active candidates in the pipeline competing with passive candidates. Fewer remote jobs, more competition.

For those who don’t remember what life was like before the pandemic, only about 3% of jobs offered remote or hybrid status in 2019.

I’ve also read commentary that it’s been harder to find jobs with higher pay. I think both of those trends have some things in common. Remember all the jobs that went unfilled by companies the past couple years? Why weren’t they able to fill those roles? I think in-office status and pay levels were a big part of why those companies couldn’t land candidates.

Many of the companies unable to fill jobs in 2021 and 2022 required employees to be in the office, which shrunk their candidate pools. Personally, I tried to hire for some tech roles that were hybrid with three days in the office, and it was very difficult to even get an interview. For many of the companies hiring today, it’s not that they have implemented return-to-office; a bunch were always that way because of either philosophy or necessity depending on industry.

Candidates were also seeking, and getting, much higher pay to switch jobs. Even companies that were paying near the middle, or upper end, of the salary bell curve had difficulties competing for talent. Some noprofits, small companies, or industries with tight profit margins had an even harder time because they offered wages at the lower end of the bell curve. While most candidates still likely get a pay bump for switching jobs, that gap has narrowed.

So, who still has open jobs? I’m not saying in-office jobs or those with a lower salary are the only types currently available by any means, but I think it is part of what is driving some of the stories I’m reading. Based on the job gains and hiring volumes, many types of companies are adding new positions and backfilling open roles. And keep in mind there’s now more competition to land those jobs as the talent pool has grown with layoffs.

Inflation Eases, Near-Term Recession Probability Declines

Perhaps one of the best trends in the past month is how much inflation has dropped. The Fed began aggressively raising interest rates last year in an attempt to stave off inflation. There are most likely some housing industry impacts that still have to be sorted out, but it appears inflation is getting back to a normal level. The annual growth in the consumer price index declined from a peak of 9.1% in June 2022 to 3.0% in June of this year.

Investors appear optimistic about a soft landing as stock prices climbed after the inflation readings. Economists are also starting to lower the probability of a recession this year based on a recent survey by The Wall Street Journal. The overall probability of a recession in the next 12 months remains elevated, but July’s report showed the largest drop in recession probability since August 2020. Close to 60% of economists named slowing inflation as the main reason.

The good news is that those economists believe job gains will continue through the end of this year, but 2024 could begin in negative territory. We shall see. The labor market beat the odds in the first half of this year.

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