August 12, 2022 | 12:55
Labour Market Fraying
Labour Market Fraying
You wouldn’t know it from the last U.S. jobs report, but cracks are forming in the drum-tight labour market on both sides of the border. While workers may suffer less this time around due to some labour hoarding, it’s probably just a matter of time before jobless rates bounce off half-century lows as the economy struggles to avoid recession.
Despite shrinking real GDP, the U.S. economy has added a net 3.3 million payrolls this year (Chart 1). The surprising strength reflects an aversion by businesses to lay off hard-to-find staff, as well as lingering demand for in-person services such as travel. Job vacancies have fallen only moderately and remain lofty at 10.7 million in June, though data from Indeed indicate some slippage in July. Postings in leisure and hospitality are especially high as many workers have left the industry. With companies reluctant to let go of staff, job postings are likely to be pulled before layoffs begin in earnest, a potential canary for the health of the market. One other sign of strength is that workers are still eager to quit, which is not what you tend to see in a faltering market.
Other data, however, suggest the U.S. labour market is fading and that rising recession talk isn’t going unnoticed in corporate boardrooms and small shops. Unlike the establishment report, the survey of households showed job losses in two of the last four months following blistering gains. This survey is noisier than its counterpart, though it appears to have a superior track record at signalling downturns, likely because it better captures turning points in business creation. The Census Bureau’s Household Pulse Survey of employment also softened last month, while hiring rates fell back to pre-pandemic levels in June. The retreat in hiring is not just a reflection of weaker demand, but the ongoing shortage of labour.
U.S. layoff announcements have bounced off recent lows, with companies such as Netflix, Tesla, and Ford announcing cuts. Many other firms plan to either slow or freeze hiring and some have rescinded job offers. Although the venerable Manpower report turned up recently, it’s more the exception than the norm. Surveys of corporate executives generally show a sharp decline in staffing plans, with small business intentions now back to early 2020 levels. Job metrics published by the Institute for Supply Management indicate net layoffs this summer. Though still below normal, weekly jobless claims have crept up since the spring. The four-week average of initial claims has climbed 48% from April’s nadir, a rate of increase often seen in recessions and never in expansions (going back to 1967). Meantime, higher continued claims suggest laid-off workers are taking longer to get rehired, as confirmed by the Conference Board’s consumer confidence survey (Chart 2).
In Canada, the evidence also leans toward an inflection point. The household survey posted consecutive job declines this summer, albeit after a hefty 5.7% increase the prior year. The establishment survey (for May) showed the first job loss since the early 2021 pandemic restrictions. On the plus side, however, Canadian job vacancies have hit fresh highs above one million. That’s comparable to the number of unemployed, which is a sign of both strength and the mismatch between employee skills/desires and available work (Chart 3). Employment insurance claims remain historically low, and the current 4.9% jobless rate is the lowest in five decades. However, the latter also reflects a recent pullback in labour force participation, which is not exactly a sign of strength.
A steady decline in employment would mark an ominous turning point for the North American economy. Not only would it greatly increase the chance of recession—none of the dozen U.S. downturns in the postwar era have occurred without job losses—it would also aggravate the slump by causing consumers to pull back further. Layoffs could also snowball if firms that are currently reluctant to let workers go sense more challenging times ahead.
Bottom Line: These were the best of times for American and Canadian workers, but they may not last much longer. Investors will need to monitor whether recent cracks in the labour market are becoming deeper fissures. While a moderate rise in the jobless rate would help relieve pressure on inflation and interest rates, larger crevices would possibly mark a tipping point toward a much harder landing for the economy.