We are in a “low hiring, low firing” labor market regime. The Job Openings and Labor Turnover Survey showed that June was the weakest month for hiring in a decade if you exclude the early stages of the pandemic. Many employers have avoided layoffs by managing costs through attrition and headcount freezes, anticipating a turnaround if the Fed starts cutting interest rates (as I noted here). At the same time, the unemployment rate has risen due to immigration and greater participation among native American workers in the labor force.
Powell’s speech at the Jackson Hole conference made it less likely that we will see layoffs, but, consistent with previous policy easing cycles, the “low jobs” part of the current regime may remain, which creates a puzzle for Fed officials. because they are trying to stabilize the labor market.
In the corporate United States, disinflationary impulses put pressure on revenue growth, making it difficult to hire employees while maintaining profit margins. This is especially true for the discretionary goods sector where sell-side analysts have cut their revenue growth forecasts for the coming quarter, according to Bloomberg Intelligence. The Consumer Price Index shows that in core goods – categories including home furnishings, clothing and cars – prices are falling each year faster than in 20 years. That’s good news for consumers, but bad news for sellers of the product.
For the housing industry, the Fed’s rate cuts will be overdue, as I noted earlier this month. A weaker-than-expected peak sales season this spring means housing-related companies have scrapped expectations for a recovery into next year. It is unlikely to increase hiring until there is more evidence that buyers are responding to lower mortgage rates.
The tech sector seems to be experiencing a jobless recovery despite investment related to artificial intelligence. The number of Google parent Alphabet Inc. has declined slightly over the past year, while capital expenditure has increased by 85%. Meta Platforms Inc., another big AI spender, has resumed net hiring over the past few quarters, but at a slower pace than in the 2010s. AI requires a lot of spending on chips, servers and data centers but, for now, it doesn’t seem to need a lot of people. Experience in 2002 also shows that the benefits in economic activity and interest rate sensitive industries in the coming year will not guarantee an increase in employment. Thus, the economy has come out of recession, consumption growth is solid, residential property investment contributes 0.3% to real gross domestic product growth, and homebuilder confidence is rising, but the overall hiring rate is flat. It took until the latter half of 2003 – almost two years after the end of the 2001 recession – for employment to increase and the unemployment rate to begin to decline. The current tension in the labor market is that the overall momentum is negative – as seen in job vacancies falling and the rate of hires and unemployment rising – although some measures such as unemployment claims and layoffs continue to be low and stable. The Fed has plenty of room to cut interest rates and should be able to reverse the negative momentum. But the prospects for hiring over the next couple of quarters look bleak.
Richmond Fed President Thomas Barkin speculated on Bloomberg’s Odd Lots podcast recently that the dynamic of low hiring and low firings is unsustainable. Until this stalemate is resolved with companies willing to increase the number of employees, the labor market is not out of the woods.
