The U.S. labor market added a very robust 315,000 jobs in August, which was in line with economists’ expectations. The prior month’s report showed an unexpected surge in hiring in July with 526,000 jobs added, so the moderation in gains from one month to the next was nothing of concern.
In total, the U.S. labor market added more than 1.1 million jobs during the summer of 2022 (June, July and August), which isn’t bad given so much talk of a likely recession or slowdown. Consider, only 368,000 jobs were added in the summer of 2019, before the pandemic began.
At some point, likely soon, the pace of job gains will slow more substantially, but the number of jobs added the past three months was more than impressive given the general pessimism related to the economy.
The unemployment rate increased by 0.2% in August to 3.7%, up from 3.5% in July, but the reason for the increase might be different than what you think. The unemployment rate represents the share of those unemployed and looking for work compared to those who are in the labor force, both employed and unemployed. And an increase in the unemployment rate can be caused by an increase in the unemployed population through layoffs or due to people, who are unemployed and looking for work, entering the labor force and increasing the pool of available talent.
While you’ve likely seen news headlines related to layoffs at some companies, initial unemployment insurance claims have been trending lower since mid-summer. Economists watch that metric as a leading indicator for layoffs because the actual reported number lags by a month or two. Initial unemployment insurance claims are approximately where they were the summer before the pandemic began, which was considered the tightest job market in half a century.
There have been plenty of instances of well-known companies implementing layoffs, but the aggregate numbers are still below historical norms, at least so far. The latest reported number of layoffs from the Bureau of Labor Statistics was for July, and it showed just under 1.4 million layoffs that month. While there have been more announcements since then, there would need to be an additional 400,000 layoffs each month just to equal the averages from 2015 to 2019. That said, certain industries are starting to feel the pain faster, but more on that later.
The main reason for the increase in the unemployment rate is a good one for employers. The labor force increased by 786,000 people between July and August, following declines in three of the previous four months. In terms of absolute volume, it was one of the largest monthly increases in the labor force on record dating back to the late 1940s.
Are people being forced into the job market at this point due to higher costs on everything from rent to groceries? Probably. Inflation has eased from 40-year highs reached a few months ago, but the Consumer Price Index still registered 8.3% on an annual basis in August, well above typical merit increases given by employers.
Some prices are starting to drop, but others are still increasing at rates not experienced in decades. Gasoline prices showed a welcomed dip in August, down 10.6% in a single month, but they were still up 25.6% from a year ago. Food prices were up 11.4% from the prior year. It was the biggest annual price increase for food since 1979. If it seems like your utility bill was higher this summer, it was not just because of the heat dome that plagued much of the country. It was also because the price of electricity was up 15.8% from a year ago. It was the largest annual increase in electricity prices since 1981.
The lingering impact of inflation will likely push more people into the labor market, but the question is how long the labor market can keep adding new jobs and remain disconnected from broader economic trends. The Fed is expected to raise rates an additional 0.75% — or possibly even 1% according to some prognosticators — with hopes it will further stifle inflation.
The Fed’s rate increases are already impacting the housing market, as well as associated businesses such as the mortgage and construction industries, causing more widespread layoffs in those areas. How far will the ripple effect go?
Recently, Bloomberg published an article highlighting the concerns of a “white-collar recession” based on which industries potentially over-hired during the past couple of years under the assumption that demand would maintain for a longer period. I do not think it is as simple as which industries or types of jobs rebounded the fastest the past two years, but there are some trends worth noting.
Overall, the financial industry was only slightly impacted during the pandemic relative to other sectors, and it was on the leading edge of job recovery. A booming stock market, low interest rates, an incredibly strong housing market, and logistics related programs such as fulfilling the Paycheck Protection Program were all in the industry’s favor. Those drivers have largely evaporated.
Many companies did over-hire and offer total benefits packages that seemed irrational to those competing for the same talent. Technology jobs are often the most referenced in this area. As the market readjusts, those companies and individuals will likely be exposed in a way more pragmatic companies will not be. The question is whether these situations are an indicator of trends that will ultimately hit more sectors. In general, a more significant moderation in job growth is likely on the way.
In the nearly two decades I’ve been involved with forecasting the labor market, there are few times I can remember that we’ve encountered such a wide range of potential outcomes in the near-term projections. One thing I do believe will happen is the pace of rising wages for new hires will start to moderate substantially. There will simply be too much pressure from external forces to let the new going rate for talent rise as quickly as it has the past couple years.
If you’re an employer that hasn’t kept up with pay, you will still have challenges attracting and retaining talent, but the good news is the gap between in-place salaries and the rate for new hires should remain steadier or even narrow in some cases. There could be industries such as health care that struggle with that trend more than others, but look for wage inflation to be more under control in 2023.