To kick off the year, the first economic and labor-market data released have been mostly positive. And given the pessimistic sentiment that has lingered since the summer of 2022, I’m not sure what more we could ask for at this point. Net job gains remain strong, layoffs are still below normal levels despite headlines, and inflation has eased.
The question is whether it’s all enough to avoid a recession this year, or if a slowdown is unavoidable.
Let’s dig into it.
2022 Closes Out Strong
The final jobs report for 2022 was another good one. Employment increased by 223,000 jobs in December, bringing the full-year total to approximately 4.5 million new jobs created, a growth rate of 3%.
Some initial reports focused on the fact that the monthly total was the lowest in the last two years — which is true — but moderation was expected and even unavoidable. In addition, December’s job gains were still strong compared to pre-pandemic totals. As we’ve discussed many times in this column, the pace of monthly job gains has been at an unsustainable level, and a slowdown in monthly gains alone should not cause any overreactions.
Turnover Remains High, But…
Job openings and other metrics related to the churn, or turnover, in the labor market remain persistently high, although those figures lag many others in terms of timeliness. For November 2022 — the most recent data available as of this report — there were close to 10.5 million jobs open, almost 6.1 million people hired, and 4.2 million employees that voluntarily quit their job.
The forecasts from LaborIQ predict each one of those figures to moderate in 2023 to levels that were more on par with pre-pandemic trends. In terms of hiring, the latest forecast is for close to 64 million hires for 2023, down from roughly 76 million in 2022, but still a substantial number of job openings to fill. If the labor market continues to defy odds and stays stronger for a longer period, there is room for upside in the forecast.
Weathering the Slowdown
Even with a slowdown in the economy and the resulting impacts to businesses and headcounts, it is important to remember that the hiring engine for companies cannot be shut down completely. I’ve heard the phrase, “We aren’t hiring,” but that is often not completely true. While companies may hold back on creating as many new positions, most businesses will still need to backfill a significant number of roles throughout 2023 due to voluntary turnover.
There is still plenty of optimism for the labor market, but news of layoffs continues for some well-known companies. Goldman Sachs is one of several financial firms that have joined tech companies in the trend of mass layoffs. Still, initial unemployment insurance claims remain at fairly low levels and do not indicate there is yet a bigger problem.
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Back on the good-news front, some of the key inflation indicators continue to moderate. The consumer price index declined for the sixth consecutive month in December. While aggregate prices for items within the index were still 6.5% higher than the prior year, the decline from June’s peak of 9.1% is significant.
On a month-to-month basis, prices were lower for gasoline and energy costs in December, which helps consumers with their typical monthly expenses. Unfortunately, food prices continued to increase and were up 11.8% from the year prior. It’s easy math to see that the higher wage gains many employees have had the past year, often through switching jobs, have been wiped out by an increase in costs.
Based on a Wall Street Journal survey of economists, close to 68% expected it to take until Q4 2023 or Q1 2024 for the Fed to lower interest rates. In the meantime, the Fed could keep raising rates until the pace of inflation falls below interest rates.
2023: A Year of Moderation
Consumers are responding favorably to seeing a slowdown in inflation, but they are still troubled by the overall economic environment. The University of Michigan’s survey of consumer sentiment showed an index of 64.6 in January, the highest in nine months. On the surface, that sounds like fantastic news, but recent readings have been among the lowest ever recorded.
June 2022 had the lowest consumer sentiment index ever recorded, and the survey has been around since the 1950s. Still, improvement is a welcome sign for a society that has gone through a pandemic, an ever-changing job market, and rapid inflation for the goods and services they purchase.
Normalization and moderation to rates more in line with historic norms should be the theme this year, but it might be a bumpy road to get there.