Editor’s note: Gad Levanon is chief economist at the Burning Glass Institute. He is a former head of the Conference Council’s Labor Market Institute. The opinions expressed in this commentary are his own.
For many economists and analysts, the US economy has represented a paradox this year. On one side, GDP growth has slowed significantly, and some argue, even entered a recession. On the other hand, overall employment growth has been much stronger than usual.
While GDP fell at an annualized rate of 1.1% in the first half of 2022, the US economy added 2.3 million job in the last six months, far more than in any other six-month period in the 20 years preceding the pandemic.
This tight labor market – and the rapid wage growth it has spurred – is causing inflation to become more entrenched. That The consumer price index, which measures a basket of goods and services, was 8.3% year-on-year in August. That’s down from the 40-year high of 9.1% in June, but still painfully high. To address that, 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 up better than many expected. Atlanta Fed’s GDPNow estimates for real GDP growth in the third quarter of 2022 are 2.3%, suggesting that while economy now growing much slower than last year, we are still not in a recession. As the demand for goods and services strengthens, the demand for workers who produce those goods and services increases.
Second, despite the slowdown in the economy and growing fears of recession, layoffs are still historically low. Initial requirements regarding unemployment insurancean indicator highly correlated with layoffs, was 219,000 for the week ending Oct. 1 — higher than the week before, 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. This is because companies are concerned that they will have trouble recruiting new employees when they start expanding again.
Third, many industries are growing faster than usual because they are still recovering from the pandemic. Convention and trade show organizers, car rental companies, nursing homes and childcare services, among others, are all growing rapidly because they are still well below pre-pandemic employment levels.
Fourth, just as some industries are growing because they are still catching up, others are experiencing high growth as they adjust to a new normal of higher demand. Demand for computing and hosting services, semiconductor manufacturing, mental health services, testing laboratories, medical devices and pharmaceutical manufacturing are higher than before the pandemic. And these are likely to represent structural changes in buying patterns that will keep demand high.
Fifth, during the pandemic, corporate investments in software and R&D reached unprecedented levels, driving a rapid increase in new STEM jobs. Because these workers are particularly well paid, they have had plenty of disposable income to spend on goods and services, which has supported job growth throughout the economy.
These factors are spurring positive momentum that will not disappear overnight. Employment growth is likely to slow from its historically high rates, but it will still remain solid in the coming months. ManpowerGroup’s Employment Outlook Survey shows that hiring intentions for the fourth quarter are still very high, despite a decline from the previous quarter.
Next year, however, is going to look very different. Many of the industries still recovering from the pandemic will have reached pre-pandemic employment levels. With demand saturated, these industries may return 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 the demand for workers or increase the labor supply. But it is difficult to create a boost in the labor supply. It requires the kind of legislative action needed to increase immigration, get people into the workforce, or increase investment in workforce education. This is likely to prove elusive in today’s polarized political environment.
The only option that leaves the Fed is to create a recession by continuing to raise interest rates. Expect to see it happen in 2023.