The Fed will need to see further easing in labor market conditions before it decides to pause its interest rate hikes
Despite several layoff announcements by major companies in recent weeks, the US labor market remains extremely robust. While FrontierView continues to expect a recession in 2023 due to aggressive monetary tightening by the Federal Reserve, it is unlikely that the US economy will experience a major spike in unemployment. MNCs should therefore expect a relatively resilient consumer spending outlook, although that will be partially offset by anxieties around inflation, higher mortgage rates, and lower levels of personal savings. Despite some easing, MNCs should continue to expect difficulty in hiring, as well as wage pressures coming from demands for inflation-busting pay rises.
- The last year has been a period of extraordinarily aggressive monetary tightening in the US, with the Federal Reserve increasing its benchmark interest rate from 0.25% to 4.75% in 11 months.
- The end of cheap money has impacted some sectors heavily, including tech: in recent weeks, news headlines have been dominated by announcements of layoffs, with Amazon (18,000 layoffs), Alphabet (12,000), Microsoft and Meta (11,000 each) all announcing job cuts.
- Despite their newsworthiness, the scale of these layoffs is relatively small when compared to the size of the overall labor market.
- In fact, the labor market remains very strong by historical standards: unemployment (3.4%) is at its lowest level since the 1960s, and there are still around two job vacancies for every unemployed person in the US.
- This can be attributed to a smaller labor force, which has yet to recover to its pre-pandemic size, but also to continued hiring in sectors such as hospitality and healthcare, which are still recovering from the pandemic.
One could be forgiven for thinking the US labor market is in a dire state, when looking at the seemingly never-ending layoff announcements by major corporates in the US. However, many of the layoffs seen recently were by companies, particularly in tech, who went on aggressive hiring sprees during the pandemic, and who have been hurt by changing expectations in financial markets. Tech companies also represent only about 2% of total employment in the US and are therefore not necessarily representative of the wider economy.
True, some indicators of labor market tightness are softening: continued (i.e. long-term) unemployment claims are inching up, indicating that it is taking people longer to find a job, which is consistent with the slight decrease in the rate of job openings. Meanwhile, the rate at which Americans are quitting jobs has also eased, indicating some nervousness about job availability.
The fact remains, however, that the American labor market is entering the upcoming economic slowdown on a remarkably strong footing, with unemployment at a 53-year low. This bodes well for several reasons. First, the high number of job vacancies relative to unemployed people will provide a buffer: employers will withdraw job vacancies before they start cutting jobs, particularly given the difficulties many of them have faced in hiring in the last two years. This will prevent a spike in the unemployment rate usually seen during recessions. In turn, the absence of widespread layoffs should support consumer spending, the engine of the American economy, and partially offset headwinds such as inflation and the erosion of personal savings.
While the labor market situation is positive for the economy, it also complicates the Fed’s job; tight job markets are inflationary, and wage growth, currently at 4.4% YOY, is far above the levels desired by the Fed. The central bank will need to see further easing in that respect before it decides to pause its rate hike cycle.
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