It’s easy to look at the rise in the unemployment rate over the past six months and attribute it to a growing labor force, as Goldman Sachs Group Inc. argued over the weekend, or a normal rebalancing of the economy that will help control inflation, as I suggested last week was one possibility. Neither argument captures the nuance of labor market changes this year, and how workers should be thinking about their job prospects going forward.
While the odds of getting laid off remain very low, for the small — but growing — percentage of people who are either unemployed or looking to change jobs, conditions are arguably worse now than they’ve been in more than five years, outside of the pandemic. It’s important not to gloss over this reality because a number of signs point to a continuing deterioration so long as the Federal Reserve keeps interest rates at a level that restrains the economy.
The softness beneath the surface of the labor market is being masked by a strength that’s easy to see. The unemployment rate, at 3.9% in October, is still historically low as is the rate at which people are being laid off. The percentage of prime-age Americans who have jobs — categorized as those between the ages of 25 and 54 — is at 80.6%, higher than it was at any point between 2002 and 2019. It’s accurate to say that a notably large percentage of Americans have jobs, and that they feel pretty secure in those jobs. That’s the good news.
For people who are unemployed or not in the workforce but looking to find a job, the labor market can be best described as balanced, with a bias toward worsening rather than strengthening.
The rate at which workers were being hired in September was flat for a third consecutive month, holding at post-pandemic lows that resemble the environment we saw between 2015 and 2017. These were a decent few years for workers but not as strong as 2019 or 2022. The hiring rate is around the 50th percentile if we look back to the start of the data series in 2000.
The monthly consumer confidence series put out by the Conference Board asks workers whether jobs are plentiful or not, and we’ve seen some slippage here as well. In October, 39.4% of respondents said jobs were plentiful, around what we saw in early 2018, but a deterioration from 2019 or the latter parts of 2021 into 2022. A labor-differential index — which looks at those saying jobs are plentiful minus those saying they’re hard to get — has been below the 2019 average since May. Workers might be experiencing a slowdown in the labor market not fully captured by headline payrolls prints.
Even though the layoff rate is low, the number of unemployed people is rising because hiring has slumped. The non-seasonally adjusted series of continuing jobless claims, or people who are collecting unemployment benefits, is now up by more than 25% from a year ago.
Additionally, in the monthly jobs report, the number of people who have been unemployed for at least five weeks saw
double-digit percentage increases in September and October on a year-over-year basis, gains that in the past 25 years have meant the economy was already in recession.
The post-pandemic recovery, however, has been full of surprises. The economy is not currently in a recession and we’re likely to see historical patterns in the labor market break this cycle. I’d rationalize the slump in the hiring rate by saying that companies had to scramble to hire workers when demand was booming in 2021 and 2022; many companies now find themselves sufficiently staffed or overstaffed as demand normalizes, keeping a lid on hiring.
On the workers’ side, some may have over-extrapolated lessons from the strong labor market of the past two years and have been unreasonable in their demands, which has left them unable to find work for longer.
While this may be the right way to think about the data — and I expect the economy to skirt a recession in 2024 — it’s reasonable to expect conditions to weaken from here given Fed Chair Jerome Powell believes monetary policy is “probably significantly restrictive.”
Any further weakening in the hiring rate or increase in the layoff rate would shift labor market dynamics from bifurcated or balanced to one where a majority of workers begin to grow concerned about holding onto or getting a job. And if that were to happen, consumers might finally start to rein in their spending levels, creating the kind of recessionary risk the US economy has so far avoided.
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