While GDP declined at an annualized rate of 1.1% in the first half of 2022, the US economy added 2.3 million jobs in the last six months, far more than in any other six-month period in the 20 years prior to the pandemic.
This tight labor market u2013 and the rapid wage growth it has spurred u2013 is causing inflation to become more entrenched. The Consumer Price Index, which measures a basket of goods and services, was 8.3% year-over-year in August. Thatu2019s lower than the 40-year high of 9.1% in June but still painfully high. To address it, the Federal Reserve is likely to drive the economy into a recession in 2023, crushing continued job growth.
Why has employment growth remained so strong?
First, the US economy is holding on better than many expected. The Atlanta Fedu2019s GDPNow estimate for real GDP growth in the third quarter of 2022 is 2.3%, suggesting that while the economy is now growing much more slowly than it did last year, we are still not in a recession. When the demand for goods and services strengthens, so does the demand for workers producing these goods and services.
Source: CNBC- TV 18
Second, despite the slowing of the economy and the growing fears of recession, layoffs are still historically low. Initial claims for unemployment insurance, an indicator highly correlated with layoffs, were 219,000 for the week ended October 1 u2013 higher than the week prior, but still one of the lowest readings in recent decades. After years of increasingly traumatic labor shortages, many employers are reluctant to significantly reduce the number of workers even as their businesses are slowing. Thatu2019s because companies are worried that they will have trouble recruiting new workers when they start expanding again.
Third, many industries are growing faster than normal because they are still recovering from the pandemic. Convention and trade show organizers, car rental companies, nursing homes, and child day care services, among others, are all growing fast because they are still well below pre-pandemic employment levels.
These factors are spurring positive momentum that will not disappear overnight. Employment growth is likely to slow down from its historically high rates, but it will still remain solid in the coming months. ManpowerGroupu2019s Employment Outlook Survey shows that the hiring intentions for the fourth quarter are still very high, despite dropping from the previous quarter.
Source: Mint – Intuit
Next year, however, will look very different. Many of the industries that are still recovering from the pandemic will have reached pre-pandemic employment levels. With demand saturated, those industries may revert to slower hiring. But this alone is unlikely to push job growth into negative territory. What will do that is monetary policy.
There are two ways to rein in the labor market: Either reduce demand for workers or increase the labor supply. But itu2019s hard to engineer a boost in labor supply. That takes the kind of legislative action needed to increase immigration, drive people into the labor force or grow investment in workforce training. This is likely to prove elusive in todayu2019s polarized political environment.
The only option that leaves the Fed is to engineer a recession by continuing to raise interest rates. Expect to see that happen in 2023.What are your views on this? Comment down your thoughts in the comments section.
