Labor Market Is Still Running Hot

Job gains remain strong, though cracks are starting to emerge as employers prep for a potential recession.

November 07, 2022

ALEXANDRIA, Va.—U.S. employers added 261,000 jobs in October, reports the Wall Street Journal, and although that is a strong number, it’s the least amount of added positions since December 2020. Unemployment increased to 3.7%, up 0.2 percentage points over September. The unemployment rate has shifted between 3.5% and 3.7% since March.

Wages increased last month, rising 0.4% from September to October. However, wage growth slowed on an annual basis, up 4.7% in October year over year, down from 5% in September. Wage gains have been weakening since their peak in March at 5.6%, but they are well above pre-pandemic levels, reports the Journal.

“The earnings numbers in these data are still not consistent with 2% inflation,” Boston Fed President Susan Collins told the Journal, referring to the U.S. Federal Reserve’s target level. “There’s clearly more work to do there.”

The Federal Reserve wants to slow wage-increase rates in order to ease price pressures.

Fed Chairman Jerome Powell last Wednesday said the labor market was “overheated,” and wage increases are “well above” what would consistent with the central bank’s 2% inflation target.

“The labor market’s going from 100 miles per hour to 85,” said Rob Dent, senior U.S. economist at Nomura. “The Fed’s looking for 40, and we’re still not very close to that.”

According to Ian Shepherdson, chief economist at Pantheon Macroeconomics, the labor market is being pulled in two different directions. Employers are still filling positions that were cut during the pandemic, while other companies are easing their hiring plans or laying off workers amid potential recession worries.

“Late summer, early fall maybe, there’s been a meaningful step down in the pace of hiring,” Shepherdson told the Journal.

As mortgage rates have steadily increased, the pace of hiring in construction has slowed down significantly, with the U.S. adding only 1,000 jobs in the field last month, compared to 22,000 in September. Also, transportation and warehouse jobs are flat since the summer, as consumers have stopped spending as much on goods and more on services such as housing, utilities and transportation.

A CEO of a Colorado home builder is holding back on hiring senior-level roles due to the uncertainty in the market but is still hiring for lower-level positions.

“People are still trying to fill roles they’ve been trying to fill for the last two years,” he told the Journal. “They’re also thinking: come January, February, March, am I actually overstaffed? It’s a real mind-bender.”

Health care added the most jobs in October—53,000—and professional and technical services added 43,000, while manufacturing increased by 32,000 jobs. Leisure and hospitality also added 35,000 last month. The sector is seen as a bellwether, as it was hit hardest by the pandemic, and numbers are still below pre-pandemic levels.

“Job gains were fairly widespread, and overall wage gains are still too high,” Marvin Loh, senior global macro strategist at State Street, told CNBC. “So, steady as she goes from a Fed perspective, but incrementally, there’s reason to have a little hope that we’re starting to see some of the froth come out of the [jobs] market.”

The Fed raised interest rates another 0.75 percentage point last week. This was the Fed’s fourth time raising interest rates by 0.75 point. Federal Reserve Chair Jerome Powell said rates could increase by a smaller amount during December’s meeting but could also raise borrowing costs next year more than projected.

CNBC reports that these repeated rate increases are partially an attempt to cool the labor market, as there are still close to two jobs open for every available unemployed worker. Job growth remain much higher than pre-pandemic levels, where the average monthly payroll increase was 164,000 in 2019.

Tom Porcelli, chief U.S. economist at RBC Capital Markets, told CNBC the broader picture is of a slowly deteriorating labor market.

“This thing doesn’t fall of a cliff. It’s a grind into a slower backdrop,” he said. “It works this way every time.”

“Demand is still strong,” Amy Glaser, senior vice president of business operations at Adecco, a staffing and recruiting firm, told CNBC. “Everyone is anticipating at some point that we’ll start to see a shift in demand. But so far, we’re continuing to see the labor market defying the law of supply and demand.”

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