Corporate America has greeted 2024 with a run of job-cut announcements. The reductions, though modest, seem puzzling at a time when the stock market is flirting with all-time highs and real gross domestic product growth continues to be healthy. Think of this as the latest phase in the economy finding a new post-pandemic normal.
A rapid moderation in inflation over the past year has led consumers to begin feeling more optimistic, while markets and the Federal Reserve predict lower policy rates this year. One constituency that isn’t necessarily benefiting is corporations, and that’s showing up in the labor market. Executives need to see stability in business conditions or an uptick in inflation before having the confidence to accelerate hiring again.
An under-discussed way in which companies have reduced costs is by tightly managing workweeks even while overall job growth has remained respectable. Average weekly hours for employees dropped to 34.3 in December from a pandemic high of 35. Total hours worked in the US did not grow at all in the fourth quarter of 2023 despite the economy adding 494,000 jobs. In fact, the shorter workweek means we’ve seen only a 0.4% uptick in total hours worked since last January, which would be as if the economy had been adding only about 50,000 jobs per month rather than the 200,000 it actually added.
This caution stems from the reversal of fortune corporations have experienced in the past year. Back in 2022, high inflation was bad news for consumers and financial markets but a tailwind for companies that were able to pass along price increases to paper over any drop in demand.
A good example of this is Home Depot Inc. In the quarter ended May 1, 2022, customer transactions fell 8.2% as consumers shifted their spending from goods to services, but the average purchase price surged 11.4% as rising prices for things like lumber meant customers spent more actual dollars in its stores. This stagflationary situation was bad for the economy, but the bean counters at Home Depot could still show investors that they were growing revenues in a difficult environment.
The deceleration in inflation over the past year means that’s no longer the case. Price declines for lumber and other commodities combined with tepid demand means companies no longer have the pricing power they did during the earlier part of the pandemic recovery.
At Home Depot, a 2.4% decline in customer transactions in the quarter ending Oct. 29 from the previous year signaled stabilizing demand, yet average ticket growth turned negative, down 0.3%. Conagra Brands, the maker of Slim Jim meat snacks and Duncan Hines cake mix, said this month that it expects organic sales to fall 1% to 2% in the year ending in around late May, and reduced its operating-margin outlook.
Companies are now scrutinizing the hiring and pay increases of the past few years to protect those profit margins. Home Depot did some modest layoffs last summer, while Nike Inc. ended 2023 saying it would seek as much as $2 billion in cost savings by dismissing workers and simplifying product lines. Airlines — another industry that has lost pricing power over the past few quarters — are looking to reduce domestic flight capacity and manage costs.
What’s happening is similar to the dynamic that “pandemic winner” tech companies went through between 2020 and 2022, only not as extreme. Companies in e-commerce and media streaming saw a surge in demand during the early days of the pandemic, which they responded to by hiring a lot and pushing up wages, only to see that demand melt away as the pandemic impacts on the economy faded. The hangover came in 2022, with job cuts and hiring freezes, which continued through 2023 and into this year, too.
For the broader economy, that surge in demand came in 2021 and 2022. Nominal GDP growth was 10.7% in 2021 and 9.1% in 2022, growth rates not experienced in 35 years. Employers added 12 million jobs in the US during those two years.
Nominal growth in the fourth quarter of 2023 was likely far weaker than that. Consumer price inflation came in at a 1.8% annualized rate, and trackers like the Atlanta Fed’s project real GDP expanding at around 2%. That would mean annualized nominal GDP growth last quarter may have been below 4% — the kind of tepid pace that the US economy saw in the 2010s.
Economists might care more about real GDP growth, but corporate America lives in a world of nominal revenues and nominal profits, and that sharp drop in nominal economic growth has executives looking to cut costs where they can.
The hope is that this is all another temporary phenomenon, just one more phase of the economy shaking off the wild swings of the pandemic era. But continued disinflation will put more pressure on companies to find ways of shedding costs, and hiring freezes and reduced workweeks can quickly turn into something more nasty if demand falls any further.
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