Despite actions taken by the Fed to stifle inflation by slowing the economy — and therefore labor demand — many indicators for the labor market remain persistently strong. That might be a problem we start to face sooner than later.
The U.S. labor market added 263,000 jobs in September, a solid number that was very much in line with economists’ expectations. While it was one of the lowest monthly totals since the recovery of jobs began more than two years ago, it was still in a very healthy range and signaled that many employers are not backing off their expansion plans, despite economic uncertainty for 2023.
There are plenty of headlines related to layoffs, and some reports show a disproportionate impact on recruiters, but overall jobless claims have only ticked up slightly. The number of initial unemployment insurance claims, which are a signal of layoffs, remains very low and on par with the level from 2019. The latest report as of this writing showed 228,000 new unemployment insurance claims for the latest week. The average in 2019 was 218,000 per week in what was a very tight labor market.
The backlog of job openings remains robust at almost 10.1 million in August. The number of job openings did decline by more than 1.1 million from the prior month, but in the grand scheme of things, the number is still very elevated. (One note, though, is that health care and social assistance had 236,000 fewer job openings in August than in July, factoring in seasonal adjustments.)
The unemployment rate declined to 3.5% again in September. To put that number in perspective, the unemployment rate has only been lower than that nine times in the last 827 months, dating back to late 1953. The unemployment rate is so low for some occupations that it doesn’t even register on the scale, meaning it’s less than 0.1%. That includes men in legal occupations and women in life, physical, and social sciences.
By those accounts, the job market is as strong as it has ever been, and there is nothing to worry about…
Except, unfortunately, the job market stayed too hot for too long during the record-setting pace of the recovery. The change we have been anticipating feels like it keeps getting closer and the labor market is set to cool one way or another.
Inflation has slowed very little at this point, and the Fed has acknowledged it will take time for the recent rate hikes to work their way through the system and have a meaningful impact.
For September, the consumer price index (CPI) measured 8.2% on an annual basis, providing little relief for consumers’ budgets. A recent headline from Business Insider stated, “If the September jobs report opened the door to larger Fed rate hikes, the latest CPI print blew it off its hinges.”
It is widely expected that the Fed will raise interest rates by at least another 0.75% in the near-term, and possibly more by early 2023. Mortgage rates have already hit a 20-year high according to a recent report from Freddie Mac. Based on data from October 13, the average rate on a 30-year fixed rate mortgage was 6.92%, the highest since April 2002.
If you’re wondering what the rise in interest rates will do to slow down inflation, the housing market is a good example. Demand for housing skyrocketed the past few years, and prices adjusted accordingly. The average price of houses sold in the U.S. was $525,000 in Q2 2022, according to data from the Census and U.S. Department of Housing and Urban Development. The average was $376,700 in Q2 2019, an increase of more than 39% in three years.
Interest rates for a 30-year mortgage hovered at or below 3% for most of 2021, but now they are more than double that. The monthly mortgage for a house priced at $525,000 will now cost roughly $1,000 extra per month because of the rise in interest rates. That lowers demand for buyers because they simply don’t have room in the monthly budget to afford it. The only way for transactions to continue at the same volume is for prices to come down, which is one example of how rising interest rates work to rein in inflation.
The challenge is that many sellers cannot or will not adjust to the new market value. It takes time for the new change to work through the system. Keeping assumptions simple in this example, the price could need to be lowered down to $375,000 to keep the monthly payment the same if the buyer put 20% down in both scenarios, which would exclude many people from even being able to sell their homes without taking a significant loss.
The mortgage rate example shows how prices will end up needing to be readjusted for houses to sell, but it will also have a direct impact on the labor market, as well. There have already been job cuts in the mortgage industry, but the effect will be much broader. Fewer remodels of homes will occur, which impacts specialty trade construction, retail stores selling the materials, and the transportation sector that delivers goods to the stores. And on and on. Expenses will need to be lowered to offset the change in revenue, which will result in some degree of job loss.
That was a small focus on the housing industry, but the cost of capital is rising for all businesses. The question is how wide and deep the ripple effect will go. Will it be a soft landing or a more painful impact? Opinions are somewhat split, but some type of slowdown will occur.
I’ll be covering LaborIQ’s outlook for the job market at the ERE Recruiting Conference, Nov. 7-9, in Atlanta. During my session, “Explaining Today’s Seemingly Unexplainable Labor Market,” we’ll examine the forces making today’s labor market so tight, and the different scenarios we are anticipating in 2023. As a preview, here are a few items I’ll be covering:
Any way we slice it, the number of new jobs created will be one of the lowest in at least the last few years, but that shouldn’t come as much of a surprise. The volumes should normalize and start to look closer to what they did before the pandemic.
It’s projected that job openings should moderate to approximately 8 million, down from a record of close to 12 million earlier this year. That total is more in line with pre-pandemic levels. Fewer job openings should ultimately cause the churn of employee turnover to normalize, as well. The number of people voluntarily quitting their job will put less pressure on hiring volumes and the need to backfill roles, and rising layoffs will cause the available talent pool to grow by some degree.
In all, its projected that there will be nearly 64 million hires in 2023, down by approximately 12 million from 2022’s projected total of 76 million hires — but still a relatively high total. This lower candidate volume will have an impact on everything from sourcing to onboarding.
The outcome will ultimately vary based on how long the job market can remain disconnected from broader economic challenges. If enough businesses weather the storm to balance out those businesses facing layoffs, 1.2 million jobs should be added in the U.S. in 2023. That is a modest total, but an optimistic version forecasts that results in a soft landing for the labor market from the impact of inflation-control measures.
On the downside, there could be a more severe hit to new job creation, particularly in the early to middle part of 2023. A more pessimistic forecast calls for job loss of 620,000 for 2023. Positive momentum begins before the end of the year and the job market recovers in 2024.
Realistically, there are possibilities outside of those ranges. The labor market typically loses millions of jobs during recessions, but will there be a recession? The labor market has been in uncharted territory for the last few years, and it might keep defying the odds.
When you get to this point in an economic and business cycle, it is difficult to predict how much things will change and when certain inflection points will occur. For a deeper dive, join me at the ERE Recruiting Conference in Atlanta. I hope to see you there!