STILL HOT? The question now is how long that business cycle might last, and whether the seeds of a serious slowdown are taking root. The median unemployment rate projected for the end of 2023 by Fed officials at their March meeting was 4.5%, implying a comparatively steep rise in joblessness that in the past would indicate a recession was underway. Fed officials would never say their aim is to cause a recession. But they've also been blunt that, as it stands, there are too many jobs chasing too few workers, a recipe for wage and price increases that could start to reinforce each other the longer the situation persists.
"The labor markets still remain quite, I would say, hot. Unemployment is still at a very low level," Boston Fed President Susan Collins said in an interview with Reuters last week. "Until the labor markets cool, at least to some degree, we're not likely to see the slowdown that we probably need" to lower inflation back to the Fed's target. Change, however, may be coming.
Daco noted the 0.3% decline in the average number of weekly hours worked in February, a statistic he says bears watching for evidence of "a more concerning labor market slowdown." Payroll provider UKG said shift work among its sample of 35,000 firms fell 1.6% in March, a non-seasonally adjusted figure that Dave Gilbertson, a vice president at the company, said indicated overall job growth that was positive but not "as overheated as it has been." Job gains in January and February were larger than anticipated and produced a brief moment when Fed officials thought they might have to return to larger rate increases, a sentiment that died after the recent bank failures. Economists at the Conference Board, meanwhile, said a new index incorporating economic, monetary policy, and demographic data showed 11 of the 18 main industries at modest-to-high risk of outright layoffs this year. Conference Board economists have been bearish in contending that a recession is likely to start between now and the end of June, though "it could still take some time before there are going to be widespread job losses," said Frank Steemers, a senior economist at the think tank.
EYE ON SERVICES Some of that may be starting.
The Labor Department on Thursday unveiled revisions to its measure of jobless benefits rolls showing that more than 100,000 additional people have recently been receiving unemployment assistance than previously estimated. Moreover, outplacement firm Challenger, Gray & Christmas said the roughly 270,000 layoffs announced this year through March were the highest quarterly total since 2009, outside of the pandemic. For the Fed, however, that is just one part of the puzzle. How "slack" in the labor market links to lower inflation may depend on where job growth slows, and over what timeline. New research from the Kansas City Fed suggested the process may prove stickier than expected because the service sector industries currently driving wage growth and inflation are the ones that are least sensitive to changes in monetary policy. If industries like manufacturing and home building follow familiar patterns as the Fed raises interest rates, credit gets more expensive and demand and employment slow. But the service industries that are responsible for most U.S. economic output are more labor-intensive and less sensitive to rate increases, Kansas City Fed economists Karlye Dilts Stedman and Emily Pollard wrote. "The services sector, in particular, has contributed substantially to recent inflation, reflecting ongoing imbalances in labor markets where supply remains impaired and demand remains robust," they wrote. "Because service production tends to be less capital intensive and services consumption is less likely to be financed, it also tends to respond less quickly to rising interest rates. Thus, monetary policy may take longer to influence a key source of current inflation." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Jobs gains remain strong Job gains remain strong Job gains remain strong Frequency of unemployment rates Frequency of unemployment rates Frequency of unemployment rates Rising unemployment and recession Rising unemployment and recession Rising unemployment and recession More jobs than jobseekers Unemployed to job openings More jobs than jobseekers in the US Layoff risk index Conference Board Industry Layoff Risk Index ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)
