A Welcome Slowdown Is Underway

Article originally posted on CoStar on November 15, 2023

Despite the Federal Reserve’s aggressive tightening program over the past 20 months, the labor market has been surprisingly resilient. The 22 million jobs lost in March and April of 2020 as the economy shut down due to the pandemic were fully recovered by June 2022, and since then, another 4.5 million jobs have been added, an average of 282,000 per month.

The strength of the labor market has kept the Federal Reserve on guard given the potential for wage gains to fuel more robust consumer spending and trigger a wage-price spiral that would confound efforts to battle inflation.

So it comes as a relief to see that while the labor market remains healthy there are signs that it is cooling. The three-month average of job gains has been on a broad slowing trend for more than two years, and the latest report from the Bureau of Labor Statistics (BLS) showed that nonfarm employment grew by 150,000 positions in October, bringing the three-month average down to 204,000.

This still represents a healthy jobs market as it is higher than the 2015-2019 average, but there is a high likelihood that the figures reported for October are overstated and will be revised lower. After all, the BLS revises figures constantly and revisions have pulled job gains lower in eight of the past 10 months, a trend that suggests an overall slowing market. Employment numbers for August and September were lowered by 101,000 combined. On average, initial monthly employment estimates have been trimmed by 37,000 positions in 2023.

In a separate survey, the BLS reported that the unemployment rate ticked higher to 3.9%, its highest rate since January 2022, and the labor participation rate, which has yet to recover to its pre-pandemic level of 63.8% in February 2020, fell to 62.7%.

Economists expect softening labor supply to be a continuing challenge as more baby boomers retire and leave the workforce. In the last two months, meanwhile, fewer prime-aged workers, or those between 25 and 54 years of age, have entered the labor force.

Hiring in October was overwhelmingly concentrated in non-cyclical sectors, or those less affected by the rise in interest rates because their growth depends on the size of the population rather than the health of the economy. Private education and health services grew by 89,000 positions in October, with about 85% of those in health care. This super sector has added more than 1.1 million jobs since the onset of the pandemic. Governments added 51,000 positions in October.

While total nonfarm payrolls have grown by 1.2 million in the past six months, nonfarm employment excluding these non-cyclical sectors has only expanded by 403,000 positions. The manufacturing sector lost 35,000 jobs largely due to striking autoworkers, but most of these losses are expected to be reversed in next month’s report.

Economists point to job postings data to gauge the strength of the labor market, and these have been showing robust demand for workers. The Labor Department in a separate survey reports that there were 9.6 million job openings as of the end of September, a figure that has increased for two consecutive months. Prior to the pandemic, there were 7 million job openings, meaning that there are 37% more job openings today than then. But job openings were rising faster than actual jobs well before the pandemic began. Had the trend from 2010 to 2019 continued at the same rate, we would now have 8.3 million job openings, indicating that today’s job openings are only 15% above-trend.

That openings remain high could be a sign that employers are being more discriminating in filling the positions that they are advertising for. This idea is borne out by other data provided by the Labor Department. Initial claims filed for unemployment benefits by those recently let go from their jobs have remained quite low. But continuing claims, or those filed by workers who have remained unemployed for a longer period, are climbing, suggesting it is taking the unemployed a longer time to secure a new job.

Other indicators also suggest an overall cooling is in the works. After a blistering third quarter that saw the economy expand at 4.9%, consensus forecasts are for growth to slow to less than 1% (annualized) in the fourth quarter— and to be even slower in the first half of next year.

Household incomes are no longer growing as fast as their spending, after adjusting for inflation, meaning they are leaning more on credit cards and savings accounts. Already, credit card delinquencies are on the rise, and savings accounts are becoming depleted, so the stalwart consumer may not be around much longer to prop up the economy.

Moreover, higher interest rates are weighing on small business sentiment and causing heartache for businesses and consumers who need to refinance loans that were purchased when rates were low. Sounds like the party might finally be over.