Job creation has slowed.
Payrolls are expected to rise by 240,000 jobs in March, a slight slowdown from the 311,000 pace of February but still strong. Private sector payrolls are expected to account for 225,000 of those gains. A push to staff up the IRS after its being hollowed out over the last decade and the need to catch up in employment lost to the pandemic in public sector education are expected to drive public sector hiring.
The nature of job gains has shifted from the initial staffing associated with reopening to a catch-up in hiring, notably in leisure and hospitality and healthcare sectors. Positions that have long stood open are finally being filled, while employers who would have cut workers more quickly in the past are now holding onto workers, aka “hoarding” workers, in the wake of the most acute labor shortages in anyone’s memory.
The most recent Job Openings and Labor Turnover survey (JOLTS) reveals that smaller, younger firms are still driving a surge in demand for workers. Nearly four in five job openings were for firms with less than 250 employees in December and January. Those establishments, coupled with the push to fill jobs long left vacant, are more than offsetting the rise in high-profile layoff announcements.
So far, most of the layoffs we have seen have been among large firms, which benefitted most from reopening and have now overshot a bit. One firm alone added more than 800,000 jobs between the fourth quarter of 2019 and the first quarter of 2022; that is small when compared against record layoff announcements, except for those enduring the layoffs.
So far, workers who lost jobs were able to find new ones quickly; that dynamic, along with the driving force that smaller businesses have played since reopening, could reverse over the summer. Those who are on severance that includes a regular paycheck instead of a lump sum payout still show up as “employed” in the official payroll data. They do not qualify for unemployment insurance until their severance runs out.
The larger concern is how the accelerated tightening of financial conditions is likely to play out. Small and midsize firms are likely to be squeezed the hardest. Those shifts, coupled with hiring freezes and cuts by some of the largest pandemic winners are likely to trigger a contraction in employment over the summer and fall. We are not seeing the cliff-edge events we saw with the pandemic or the subprime crisis on employment; it is more of a slow moving train wreck.
Separately, unusually warm winter weather added an extra boost to much of the economic data at the start of the year. Both the weather and the seasonal adjustment of the data get much harder as we move into Spring. Most vulnerable are commercial construction and residential construction employment.
Hiring in the manufacturing sector contracted last month and is expected to modestly rebound in March. Vehicle producers have worked through many of their chip shortages but are now struggling with labor shortages in their supplier networks. That has slowed the flow of necessary parts and efforts to ramp up and replenish dealer inventories. The tightening of credit now in the pipeline is likely to further set back those suppliers.
The challenge for the Federal Reserve is that the current pace of wage gains is more consistent with inflation in the 3.5% to 4% range.
Average hourly earnings are expected to rise 0.3% in March, well in line with the three-month moving average on wage gains. That will slow the year-on-year pace of wage growth to 4.3%, after rising at a 4.6% annual pace in February. A surge in wages a year ago is cooling the year-over-year measures of wage gains. Opportunities to job hop have diminished with advertised wage gains more closely matching existing wage gains.
The challenge for the Federal Reserve is that the current pace of wage gains is more consistent with inflation in the 3.5% to 4% range than the 2% pace it is targeting. The labor market is not the only reason inflation remains stubbornly high, notably in the service sector; it is just the only aspect of inflation that the Fed can directly influence. Its goal is for a mild contraction with a moderate – one percent or so – rise in unemployment. It lacks the tools to calibrate the rise in unemployment once it starts rising.
The unemployment rate is expected to hold at 3.6% in March, the same as February. Participation in the labor market is below levels that we saw before the onset of the pandemic, largely due to aging demographics and a rise in retirements. However, an influx in immigration has boosted participation among prime-age workers (25-54 years old) in recent months. Foreign-born workers have a much higher participation rate than native-born workers.