The economy is slowing down and inflation is cooling, with no mass layoffs in sight—that’s not supposed to happen. 

Friday’s news that employers kicked hiring into high gear in January by adding 517,000 jobs came as a surprise for a number of reasons. Layoffs at Google (GOOGL) and other tech companies have dominated headlines. Other parts of the economy have been slowing down, with a multitude of indicators flashing warning signs of a recession. The domino effect of a slow down usually causes a surge in the unemployment level, and economists had expected those headwinds to at least curb the pace of job gains. 

“It’s clearly the tale of two economies,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “The labor market is extremely tight. It’s very strong, but the rest of the economy is slowing down.”

Those two things don’t usually go together, but the pandemic may have overturned the old rules.

“Historical experience may prove to be misleading in 2023,” said Matt Matt Colyar, an economist at Moody’s Analytics. “Because the scale of the pandemic and what that did to the labor market—the trends that it set in motion or accelerated—makes today’s experience different.”

Indeed, historical experience would tell workers it’s time to polish up their resumes and prepare for the worst. Corporate executives—the ones making hiring and firing decisions—are feeling gloomier about the economy than any time since the Great Recession and overwhelmingly expect another downturn,  according to the Conference Board’s CEO Confidence Index. Small business owners are equally pessimistic and consumer spending fell in November and December, as did retail sales. Manufacturing stayed in a three-month-long downturn in January. And yet, somehow, the unemployment rate fell in January to its lowest since May 1969.

There are several possible reasons that companies are still hiring like mad even as the Federal Reserve’s campaign of anti-inflation interest rate hikes smothers economic activity and  business starts to dry up, economists said.

A Smaller Workforce

The pandemic has left employers competing to hire a pool of workers that is proportionally smaller than before COVID-19 spurred millions of early retirements. The labor force participation rate is still well below its pre-pandemic level, despite a small uptick in January. The pandemic hurt immigration too, further shrinking the workforce.

On top of that, longer-term demographic trends mean that the population is getting older and there is a growing number of retirees for every working-age person. 

With workers so scarce, employers are growing reluctant to let them go during a temporary downturn.

“Businesses are hoarding labor,” Sweet said.

“Employers are correctly judging that in the past 18 months or so, the struggle they’ve had to find people to work and how much they’ve struggled to retain those workers—they calculate that that’s not going away,” Colyar said.

In addition to those demographic and pandemic factors, temporary government stimulus programs during the pandemic, such as boosted unemployment payments, gave more workers the confidence to switch jobs and seek better pay and working conditions, said Elise Gould, senior economist at the Economic Policy Institute, a progressive think tank. That’s given workers a lasting upper hand in the job market. 

“Workers really had a chance to take a beat with many of the pandemic relief measures and think about what they want from their jobs,” Gould said. “Maybe they wanted additional flexibility, or maybe they wanted wages that actually supported a decent standard of living. They have fought for those, and you see them exercising that with their feet.” 

The Data Is Weird

To be sure, it’s also possible that official measures of the job market are painting too rosy a picture. Over the years, fewer households and businesses have been responding to the surveys that the Bureau of Labor Statistics uses to collect data. 

For instance, only 31% of businesses responded to the Job Openings and Labor Turnover Survey, the source of the eyebrow-raising report that job openings rose to near record levels in December. That’s compared to a 68% response rate in 2012. Other surveys have seen similar declines.

Lower response rates mean the data could be less reliable, Sweet said.

“I don’t know how much you can trust it,” he said. “During the pandemic, everyone got bombarded with surveys and people are just responding less.”

A Soft Landing 

The Fed’s campaign of interest rate hikes are meant to slow the economy and cool down the labor market in hopes of squelching inflation. So far, wage growth has slowed and inflation has fallen faster than the Fed expected, without any of the increased unemployment economists thought would happen as a consequence—the so-called “soft landing” from a period of high inflation.

“I think if you had told the Fed a year ago that people are still talking about a soft landing in early 2023, I think they’d be ecstatic,” Colyar said. “I’m hopeful that it is possible for wage growth and inflation to come down and for the Fed to be able to kind of tap the brakes and pause without causing a real increase in joblessness.”

Whether the labor market stumbles in the coming months will depend partly on how aggressive the Fed is with its future interest rate hikes.

“I think the labor market has shown incredible resilience in light of Federal Reserve interest rate hikes,” Gould said. “Now that we see clear signs of wage deceleration, even as the unemployment rate stays low, I think the Federal Reserve should take that to heart and pause at this point. We’re getting the soft landing. Let’s call it a win.”

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