A weak labor market could help dampen inflation
The US labor market is still tight, but perhaps not as tight as it has been.
A Labor Department report on Friday is expected to show employers created about 25% fewer jobs in October compared to the previous month. Analysts say a drop in job growth is not surprising, since employers have already replaced all of the 22 million jobs that were lost during the pandemic.
A shrinking labor market could even help the Federal Reserve achieve a so-called “soft landing,” if it helps slow inflation without tipping the economy into recession.
“A gradually slowing labor market means a soft landing is still possible,” said Daniel Zhao, chief economist at job search site Glassdoor. “As long as the unemployment rate remains low, a soft landing cannot be ruled out.”
The unemployment rate in September was 3.5%, corresponding to a half-century low. Forecasters believe the October rate will remain at or near this level.
The Federal Reserve was surprised by the strength and resilience of the labor market, despite a slowdown in the overall economy. Employers added nearly 3.8 million jobs in the first nine months of the year, even as the country gross domestic product barely budged.
Federal Reserve Chairman Jerome Powell warns that even with some slowing in job growth, the labor market remains unusually tight.
“It’s a mixed picture,” Powell told reporters this week. “I don’t see the case for a real softening yet.”
Advertised job vacancies rebounded in September, after falling the previous month, so that there are again nearly two vacancies for every unemployed person.
“The labor market continues to be unbalanced, with demand far outstripping the supply of available workers,” Powell said.
As a result, employers have to pay more to attract workers. While wage growth has slowed slightly in recent months, wages are still rising faster than inflation watchers would like.
Powell said he and his colleagues hadn’t seen signs of the kind of price-wage spiral that fueled runaway inflation in the 1970s. But they’re not taking any chances.
“Once you see it, you’re in trouble,” Powell said. “So we don’t want to see it.”
Rate hikes are felt
The Fed has been aggressive interest rate hike with the aim of dampening demand and curbing inflation. This led to slower growth in industries sensitive to borrowing costs, such as construction and manufacturing.
“We’re seeing the signs of some of the Fed’s rate hikes playing out,” said Nela Richardson, chief economist at payroll processing firm ADP. “I think those would be the first signs that this policy is having an impact.”
Businesses experiencing a drop in customer demand may be slower to fill vacancies or replace workers who quit. But layoffs are still rare. Weekly jobless claims, which tend to follow layoffs, remain at historic lows.
After struggling for two and a half years to find enough workers, many employers may be reluctant to let anyone go, even when business is down.
“I feel like after talking to some CEOs, they’re latching onto people,” said Esther George, president of the Federal Reserve Bank of Kansas City. “And their argument is that it’s so hard to rehire – [after] the experience we’ve had — that we’ll be inclined to hang on to some of these positions. We’ll wait as a last resort, really, [before] liberate people.”
Employers may be hoping any downturn will be brief, and they don’t want to be short-staffed when business picks up.