DON’T TELL THE LABOR MARKET WE’RE IN A RECESSION

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by Dave Allen, The International Forecaster:

Courtenay Brown and Neil Irwin have been spot-on with their analysis of the economy recently.

Yesterday, they wrote that the “strong labor market continues to be the economy’s bright spot.”

They say it could stay robust even as the Fed sends the economy into a slowdown if, that is, “businesses hoard workers to avoid repeating past mistakes.”

Employers, particularly in industries that have struggled with labor shortages, may be more reluctant to lay people off, even as rising interest rates and other factors slow consumer and business demand.

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Brown and Irwin believe if employers maintain their payrolls, it would make the coming “economic slowdown milder and less painful for workers than recent recessions.”

They point to recent company earnings calls, where some employers have reported hesitancy to reduce their headcounts, even as growth deteriorates.

Government quarterly reports show that GDP has shrunk a cumulative 2.5% in the first half of 2022.

Chris Gorman, CEO of bank holding firm KeyCorp, said, “It’s been challenging, frankly, to be out in the hiring market in this ride-up in the last couple of years.”

That’s why he says his company will staff up more in some areas “in sort of a flat or down” environment than they have in the past.

In June, only 1.3 million workers were laid off, fired or otherwise released from their jobs, according to the Labor Department.

That’s down 28% from the average of 1.8 million in 2019 (i.e., before the pandemic) – suggesting that companies are indeed more reluctant now than they were then.

Can You Blame Them?

After the trauma of 2020 and a good part of 2021, who would want to take the chance of losing the core of their workforce, especially with so much economic uncertainty on the horizon?

Most analysts believe any recession will be mild. One of them, economist James Knightley at ING, says companies “will be reluctant to fire staff that they may end up having to recruit back maybe six months later.”

That’s exactly what happened when the pandemic began, which has left the labor market with 1.8 job openings for every out-of-work American.

So, Brown and Irwin wonder whether the painfully sluggish aftermath of the so-called brief Covid recession and especially the Great Recession is forefront in the minds of companies today…

…that is, a broad fear among employers that the next recession will be just as, if not more, painful – “if they let workers go quickly only to face a rapid economic comeback without enough workers to meet the demand.”

They point to Julia Coronado, who heads MacroPolicy Perspectives, who keenly observes, “A long, painful recession delivers one set of reactions, while a very short recession delivers another.”

“The scarring this time,” she warns, “might be that employers are inclined to hoard labor.

“They may say ‘we’re going to sacrifice a little bit of margin and not cut costs so aggressively’ because it was really painful to spend a year and a half re-staffing.”

Since the pandemic hit two-and-a-half years ago, Coronado has been following hirings reported by publicly-traded companies on quarterly earnings calls.

Coronado’s research indicates that 18% of publicly-traded companies have said in their 2nd quarter earnings calls they’re still hiring more workers, while just 3% mentioned layoffs; the rest haven’t specified.

More Than Half a Million Jobs Added in July

All of this is backdrop to this morning’s government report, which shows that hiring across the country was far better than expected in July

In what some are saying defies several other signs that the economy is losing steam, the Bureau of Labor Statistics reports that nonfarm payrolls rose 528,000 for the month. That easily beat economists’ consensus estimate of 258,000.

Wage growth also surged higher, as average hourly earnings were up 0.5% for the month and 5.2% from a year ago.

Those numbers add fuel to an already gloomy inflation picture that already has consumer prices rising at their highest since 1981.

More broadly, though, the report showed that the labor market remains strong despite other signs of economic weakness.

Liz Ann Sonders, chief investment strategist at Charles Schwab, says point blank:

“There’s no way to take the other side of this. There’s not a lot of, ‘Yeah, but,’ other than it’s not positive from a market or Fed perspective, for the economy, this is good news.”

Don’t tell that to stock market investors, though.

Markets initially slipped as the report was released, with the Dow Jones down 128 points in early trading, as investors expected the Fed to react with further interest rate hikes to cool the economy.

Even the precious metals market couldn’t initially maintain its recent momentum – with increased geopolitical tensions – driving prices up through yesterday.

Leisure and hospitality led the way in the job gains with 96,000, though the struggling and frustrated industry is still 1.2 million workers shy of its pre-pandemic level.

Professional and business services was next with 89,000. Health care added 70,000 and government payrolls grew 57,000.

Despite modest expectations, the July job gains were the best since February and well ahead of the 388,000 average gain over the past four months.

The BLS noted that total nonfarm payroll employment has increased by 22 million since the April 2020 low, when most of the economy shut down to deal with Covid.

The government’s headline U-3 unemployment rate also ticked down to 3.5% – the result of strong job creation and a labor force participation rate that fell slightly to 62.1%, its lowest of 2022. But have no illusions…

The more accurate reflection of joblessness – the BLS’ U-6 rate – which includes discouraged job seekers and those working part-time but who want a full-time job, was actually static in July at an inauspicious 6.7%.

Economists have thought that job creation would have begun to slow by the fifth month after the Fed began to raise interest rates to cool inflation.

And the strong jobs and higher-than-expected wage numbers have now led to a shift in those expectations for a September rate increase.

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