The Labor Market Is Defying the Odds

Despite ongoing layoffs, the state of labor is strong for the most part. Still, there is reason to remain cautious.

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Apr 19, 2023

The U.S. labor market added more than 1 million jobs in the first quarter of 2023, which obliterated most economists’ forecasts. In the five years before the pandemic, it took until the May-to-July timeframe to reach the million-job mark. Given the economic uncertainty heading into this year, it is hard to imagine the labor market showing any stronger results than it did through March.

During March, 236,000 jobs were added according to the U.S. Bureau of Labor Statistics. Overall, it was a very respectable and uneventful jobs report, which is a relief given how some industries and types of jobs have been impacted by recent layoffs.

The unemployment rate ticked down to 3.5%, which is essentially the rate it has hovered around for the past year. The combination of strong job gains and a low unemployment rate suggests that the majority of businesses are still confident in filling out their headcount expansion plans for this year.

Divergence in Industry Trends

Of course, the headline numbers do not tell the full story. Some industries are outshining others. The restaurant and bar industry was hit much harder during the pandemic and lagged in its recovery due to a shortage of workers. Now, it is leading the pack for job gains. Roughly 1 in 5 jobs added in March was in food services and drinking places.

Additionally, the government sector added 47,000 jobs in March, and health care added 34,000 jobs. The interesting trend was the professional, scientific, and technical services subsector added 26,000 jobs despite the drag of some tech companies continuing to experience layoffs.

On the flip side, the impact on the housing market is becoming more evident. Within the month, stores that provide building materials and garden equipment lost 9,000 jobs, as did stores that sell furniture, home furnishings, and appliances.

On an annual basis, residential construction companies are still adding jobs, but at about a third of the pace as a year ago. Mortgage and non-mortgage loan brokers have lost 10,400 jobs in the last year, and the number is likely to get worse before it gets better.

Inflation Is Cooling

Perhaps the most optimistic news in recent reports was the cooling of inflation. Annual wage growth declined from 4.6% in February to 4.2% in March, the lowest rate since June 2021. The slowdown suggests that candidates likely aren’t seeing as big of a jump in wages for switching jobs, and employers should begin to experience more manageable headcount budgets.

Annual growth in the Consumer Price Index declined from 6% in February to 5% in March, the lowest since May 2021 and well below the peak of close to 9% last summer. A concern heading into this year was that inflation pressures could push more employees into the job market simply because they needed to balance their personal budgets and expenses had been increasing much faster than wages.

While the costs of goods and services are still increasing faster than wages, the gap is tightening. More specifically, the latest figures show some relief in prices such as energy costs and medical care services. If you still feel like meals are expensive, you are correct. Food prices are up 8.5% compared to a year ago, but the numbers are moderating.

More good news for businesses and wholesale costs continue to come down as well. The annual growth for the Producer Price Index dropped from 4.9% in February to 2.7% in March. The metric measures the change in wholesale prices, which is a leading indicator of costs consumers end up paying downstream once goods hit the shelves at retailers. The growth has dropped significantly from 11.7% a year ago and should be a signal consumer prices will continue to decline.

A Cautious Outlook

All three of those metrics are headed in the right direction, but the question is if the recent drops are enough to stave off another interest rate increase from the Fed. In terms of the outlook for the rest of the year, this month I will reference results from The Wall Street Journal’s quarterly survey of 70+ economists, which was released in mid-April.

One of the findings from the survey was that interest rates are expected to remain elevated for a longer period due to inflation. More than 61% of those surveyed did not expect interest rates to decline until at least 2024, up from January’s 49%. The survey also showed a recession probability of 61% within the next 12 months, unchanged from January’s reading, and the highest that number has been since 2006, unless we were already in a recession.

As an aggregate, the group projected slightly positive job gains for the next four quarters, but the responses were all over the board. They ranged from an annual gain of close to 900,000 jobs to a loss of 1.3 million. If you feel like you’re having a hard time nailing down what is actually going to happen in the job market this year, the experts have the same struggle.

Finally, the average unemployment rate projected for December 2024 was 4.5%. Remember, that number is still below the long-term average, and considered a tight labor market from a historical standard. That said, those results suggest hiring freezes and layoffs will persist and headcount expansions will slow from the current pace. As I said in the opening line, what has happened so far has far exceeded expectations year-to-date. The question is if the labor market can keep up the momentum.

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