The strong gain of 254,000 jobs in September was a welcome surprise after months of cooling in the labor market and reinforced other signs of strength in the US economy. However, one month does not make a trend, and even with the Federal Reserve cutting interest rates, a sustained turnaround in hiring will take time.
In the latest figures from August, the rate of new hires — that is, new workers as a percentage of total employment — fell to 3.3%. This is comparable to what it was in 2013, when the unemployment rate was more than 7% (It is currently 4.1%)[CS1] Yet, layoffs remain low.
This suggests a cooling but complex labor market: Companies aren’t so worried that they’re letting a lot of people go, but they’re not so confident that they’re hiring a lot of people. This situation is unlikely to change until there is less uncertainty about the economy — and that, in turn, depends on what happens not only with the Federal Reserve and interest rates, but also with the elections next month.
Historically, the inability of people to find jobs has had a greater impact on the unemployment rate than workers losing jobs. In 2012, a research paper found that job-finding rates explained three-quarters of the changes in unemployment since 1948. Applying its methods, two economists at the Federal Reserve Bank of Minneapolis argue that the decline in the job-finding rate can also account for most of the increase in the unemployment rate since the second half of 2022. If hiring remains soft, and even with few layoffs, unemployment will likely rise.
Reducing hiring is a front-line response by companies in difficult economic times. More than half of the firms surveyed in September by the Federal Reserve Bank of Atlanta said they would slow their hiring in response to a recession or a downturn in their industry. In contrast, only one-quarter said they would lay off employees. In fact, some companies are not speculating: Almost one-fifth said their industry is already in a downturn and they have already reduced hiring.
Some slowing in the hiring rate was to be expected after the dramatic increase during the recovery from the pandemic. The leisure and hospitality industry was an extreme example, with a hiring rate almost 10 percentage points above pre-pandemic averages in July 2020 and now almost 2 percentage points below. Moreover, companies that struggled to hire during the post-pandemic labor shortages may be even more hesitant to lay off workers now, instead holding back on hiring.
A sustained pickup in hiring will likely be slow.
The Fed began cutting rates last month partly in response to the cooling labor market. But the full effects of that easing will take time to show in the unemployment rate — up to two years, according to economists at the Federal Reserve Bank of Kansas City. Manufacturing, one of the more capital-intensive and rate-sensitive sectors, has seen a considerable drop in its hiring rate since the Fed began increasing rates. It is a place to watch for the impact of the shift in monetary policy.
Getting past the presidential campaign would likely relieve some uncertainty about policy and the economy. Almost 60% of firms in the same Atlanta Fed survey said the upcoming elections were a reason to be concerned about a possible recession, compared with 50% who pointed to monetary policy. Regardless of the outcomes of the presidential and congressional races, the specifics of tax policy next year will be unresolved. As with monetary policy, uncertainty about fiscal policy will also make it hard for any drag on hiring to dissipate quickly.
There is a more long-term concern: Reduced demand for new workers could reflect the adoption of labor-saving technology. Real GDP growth has been well above its pre-pandemic trend the past few years, even with higher interest rates and slowing job gains. The higher productivity growth can also help explain the higher wage growth with slower inflation.
But the path may not be linear. A recent survey by the Federal Reserve Bank of New York showed that 10% of service-sector companies had laid off workers due to the use of artificial intelligence, or AI, in the past six months. At the same time, 19% expected to hire due to planned AI use in the next six months.
The paradox is this: Businesses are waiting for more clarity about the direction of technology and the economy before they hire more workers. Yet this very hesitation, which could lead to further increases in the unemployment rate and softer payroll gains, will only feed worries about recession risks. So keep an eye on the labor market but realize that, until the hiring rate stabilizes, it may sometimes be hard to watch.
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