Strong hiring figures send the wrong signal


Economists, politicians and commentators have been debating the recession since the start of 2022, when the first quarter real gross domestic product (GDP) report showed a decline. Those who pointed to weakness in the economy, whether for political or analytical reasons, said recession as the second quarter also showed a decline. Two quarters of decline is, after all, the rule of thumb used to identify recessions. Those who believed the economy was in good shape, whether for political or other reasons, were giving technicalities at the time. But now that many indicators have started to offer additional signs of economic weakness, optimists are pointing to still-robust hiring rates as the reason the economy will avoid recession this year. They are looking for a “soft landing” in 2023, which means an adjustment, not a recession.

Anything is possible, of course, but job growth in recent months is a dubious signal at best. Rather than a sign of fundamental strength, maintaining robust hiring in this environment is looking more and more like some sort of labor hoarding that will require adjustment for the recession — and soon.

At first glance, the employment numbers certainly look encouraging. In December 2022, for example, the popular Labor Department’s Employment Situation Summary Report cited its survey of employers to report an impressive gain of 223,000 jobs from October’s level. A separate household survey was even more impressive, recording an employment gain of 717,000. , they are nevertheless well above the general historical averages. With data like this, it’s easy to see why many are concluding that, unlike recession preparedness, companies are likely building staff to prepare for a major expansion in production.

Still, there are plenty of other data points that challenge the optimism that these hiring numbers hold. Consumers, for example, have reduced their spending. Retail sales have shown flat to negative real growth in recent months, a sharp correction from the great strength they showed in 2021 and early 2022. New home purchases are 15% lower at rates a year ago. The rate of construction of new dwellings fell by 30% during the same period. Business spending on equipment and intellectual property has held steady, but spending on new facilities has been falling for some time, suggesting that funds are being spent on efficiency and workforce substitution work rather than a general expansion. Even so, the pace of growth in business investment spending has slowed markedly compared to 2021 and early last year.

The apparent contradiction between these two different sources of economic information – employment figures on the one hand and expenditure figures on the other – demands an explanation. Fortunately, one comes from another Labor Department report: the Quarterly Look at Worker Productivity. The picture presented there suggests that the recent growth in employment, far from being a sign of economic strength, is part of a distorting trend and cannot last for long, and that this year we will see layoffs , or at the very least a sharp decline in the rate of hiring.

What these numbers clearly show is that companies are not utilizing their new hires at all. Robust hiring of course led to a strong 3% annual increase in hours worked in the first three quarters of 2022, the most recent period for which data is available. But it also shows that, for all those extra hours worked by men and women, output barely increased, growing at an annual rate of 0.2% in those three quarters. Productivity, ie output per hour worked, therefore fell during this period, falling at an annual rate of 3.1%.

This combination of facts implies that companies, instead of recruiting staff in anticipation of increased production, are hoarding labour. The impetus to do so is certainly understandable, given the labor shortages that plagued the country in 2021 and early 2022. Memories of that experience are surely enough to spur managers to hire labor. – of qualified work even in the absence of an immediate need for personnel. These memories would also make managers more reluctant to cut staff, even in the face of declining production levels. No employer wants to suffer the expense and bad feelings of layoffs under any circumstances, but companies especially want to avoid it when faced with the threat of being caught short-staffed, as was the case there n not so long ago.

The chances of an increase in demand justifying all that excess staff seem slim. The slowdown in consumer spending reflects the adverse effects of inflation on the purchasing power of household income. This problem will probably not be solved anytime soon. At the same time, further interest rate hikes being considered by the Federal Reserve appear certain to put continued downward pressure on home buying and building, at least for a few months to come. In other words, businesses are unlikely to see the sudden recovery that might justify keeping excess staff on payrolls now.

Rather than signaling a “soft landing,” this image suggests personnel adjustments are overdue. Businesses cannot remain profitable and maintain inactive or underutilized employees for long. With the hourly earnings of these workers increasing at an annual rate of nearly 3%, the cost of producing a unit of output (what statisticians call “unit labor costs”) has increased at an annual rate of 6%. This fact indicates continued pressure to raise prices through 2023. More importantly, it also underscores the urgent need for companies to review their staffing practices – they should become less willing to emulate the technology and of finance by racking up new hires, only to be forced later to turn to layoffs.

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