Beware: The Labor Market is Weakening *

 

Economists use multiple data sources to gain understanding of the state of the economy as individual data can sometimes provide conflicting information, particularly during economic transitions.

For instance, the labor market has appeared to be strong based on various data points for several months. However, the economy as a whole is showing signs of slowing down due to factors such as increased interest rates affecting equity and bond prices, stagnant inflation-adjusted consumer spending, and a decrease in construction and manufacturing activity. This raises the question of how the discrepancy between the weakened economy and the enduring labor market can be reconciled.

Recent developments suggest that the labor market may actually be softening. The Bureau of Labor Statistics reported that firms only added 223,000 jobs in December, the lowest since December 2020 when job growth was negative. The three-month average of job growth is now at its lowest since June 2020, signaling a slowdown.

Education and health services saw the largest job growth among major sectors in December, with a payroll increase of 78,000. However, this sector has a tendency to perform countercyclically, meaning it could continue to add workers even during an economic downturn. The medical industry is recovering from the challenges faced during the early stages of the pandemic, including difficulties in hiring and a lag in growth compared to long-term trends and the needs of an aging population. The sector has now regained all jobs lost since March 2020.

 

 

The leisure and hospitality sector, which encompasses hotels, bars, restaurants, and arts and entertainment, has not fully recovered yet despite adding 67,300 jobs in December. This sector still has a shortage of 930,000 workers compared to pre-pandemic staffing levels.

A clear indication that the labor market is weakening is the decrease in temporary positions in the administrative services sector, which dropped by 35,000 in December. This often foreshadows additional layoffs, as companies tend to eliminate short-term jobs before dismissing permanent employees.

Another sign of a slowing labor market is the slowing growth of wages in December. The average hourly earnings only increased by 0.3%, the slowest rate since February. This data is closely monitored by both markets and the Federal Reserve, as robust wage growth often leads to higher prices to cover increased staffing costs and eventually inflation, which the Fed aims to prevent.

 

 

A persistent discrepancy in the labor market is the amount of job openings, which the Federal Reserve utilizes as an indicator of worker demand.

As of the end of November, there were 10.5 million job openings, significantly more than the pre-pandemic peak of 7.6 million in November 2018. Job openings represent the number of jobs that companies are actively seeking to fill within the next 30 days, where "active" encompasses a written or digital listing, a "Help Wanted" sign, or word of mouth. This information is derived from a survey of 21,000 establishments, a much smaller sample than the 600,000 establishments included in the monthly jobs report, which could make it less accurate.

Job openings should decrease as the economy slows down before job losses, as in a recession, companies will stop actively looking to fill positions before they begin downsizing. However, that has already happened. On a year-over-year basis, job openings declined by 4.3% in November, a similar drop seen in February 2008 and November 2019. After those two months, nonfarm payrolls started to decrease on a year-over-year basis in May 2008 and April 2020, respectively.

 

 

 What to Keep an Eye On...

Recent economic updates have not been overly positive. The Institute of Supply Management's manufacturing index contracted in the last two months of the previous year, ending a streak of 30 consecutive months of growth, indicating a slowdown in manufacturing activity as new orders and production fell below zero. The services index contracted in December for the first time in over two years, demonstrating that even the sector that was predicted to perform well is now struggling.

Our hope for improved news is based on the expectation of a decrease in inflation, which many economists anticipate to see in the December consumer price index release this week.

If the anticipated result does not occur, it's time to brace for impact.

 

*Article re-expressed from CoStar's "Don't Be Fooled - The Labor Market Is Softing"