US employers are largely holding tight to their workforces and paying more to retain workers, setting up a potential broader wave of job losses as interest rates remain high and the threat of recession looms.. According to , According to S&P unemployment fell to 3.4% in April, the lowest monthly figure since 1969, while the labor force participation rate for workers ages 25-54 climbed to 83.3%, the highest level since 2008, according to the latest government data released May 5. Average hourly earnings jumped 4.4% year over year in April, and 0.5% from March, the highest monthly increase since the Fed started its current rate push in March 2022.
Companies are hiring despite rising costs, declining credit availability due to the ongoingturmoil in the banking sector and monetary policy tightening from the Fed, which has boosted interest rates 500 basis points since March 2022.
Economists say strength in the job market could be masking a trade-off that many companies are making amid growing fears of a recession — rather than cutting costs through layoffs, employers are essentially hoarding the labor that was so difficult to find for open positions during the earlier days of the pandemic. Layoffs may soon rise, however, as companies weigh how long they want to absorb higher payroll costs.
“That will continue until it can’t,” said Steve Wyett, chief investment strategist at BOK Financial.”Once somebody starts cutting jobs it opens the door for others to do so.”
Keep or cut
Companies, faced with higher interest rates and reduced credit access, may be more willing to pay more for higher wages now, rather than pay more to find workers later.
“We are certainly in an environment where companies and employers are more reluctant to implement the types of broad-based layoffs that we saw in 2008,” said Lydia Boussour, a senior economist with EY-Parthenon. “Companies have invested a lot of money and a lot of time trying to attract and retain the right talent.”
Yet even with nearly 9.6 million job openings, companies have become cautious with hiring. Many are implementing hiring freezes as they face rising cost pressures and elevated uncertainty, Boussour said.
Persistently high inflation and the rising interest rates that have not yet curbed it are likely to trigger a mild recession, which could cause unemployment to rise from 3.4% to 4.5%, resulting in about 900,000 jobs lost, according to Boussour’s forecast.
Layoffs, which so far have been largely confined to the tech sector, will likely spread quickly as higher wages give way to higher costs, said Wyett with BOK Financial.
As the economy slows, companies that would have previously cut payroll in response to rising borrowing costs and declining consumer demand may be willing to accept some temporary losses in revenue since labor supply has been so tight since the pandemic began. But there is only so long companies will be willing to accept these losses, Wyett said.
“Changes in the labor market start slowly at first and then they happen all of the sudden,” Wyett said.
Widespread strength
There were 253,000 jobs added in April, above economists’ expectations for 178,000 jobs, according to consensus estimates compiled by Econoday.
While all sectors recorded employment gains, private education and health services added the most jobs with 77,000, followed by professional and business services with 43,000 and leisure and hospitality with 31,000.
The latest jobs report showed an overwhelmingly strong labor market taking root during a very aggressive rate-hiking cycle, said Joel Prakken, chief US economist at S&P Global Market Intelligence.
Prakken, however, sees the current unemployment level as unsustainable and predicts it will eventually rise to between 4.5% and 5%.
“I’m very confident that unemployment has to rise, but I’m a lot less confident about how it’s going to happen,” Prakken said.
There are some signs of initial weakening in the jobs market. The number of job openings has fallen about 20%, or by 2.4 million, from its March 2022 peak, while the latest Labor Department data shows employers added 149,000 fewer jobs in February and March than initially reported. Additionally, the number of initial unemployment claims has inched up.
Still, inflation remains well above the Fed’s 2% target, widespread effects of monetary tightening have yet to take hold and consumers continue to spend.
“The economy is doing OK, that’s the bottom line,” Prakken said.
