Economic Update: September 2023

The lion’s share of jobs growth for August was in health care and social assistance. The leisure and hospitality industry continues to recover (although it remains 290,000 jobs below its pre-COVID level) and construction growth has remained remarkably strong in light of persistently high interest rates.

The August report showed an increase of hourly earnings of 0.2%, or 4.3% annually. Fortunately for workers, wage gains are outpacing inflation, which continues to bolster purchasing power and hopefully sustain economic growth. That being said, wage increases are still floating above the 3.5% rate that the Fed believes is more in line with their inflation reduction goals. “Wages have certainly slowed…but the degree of slowing we’ve seen is just achingly gradual,” said Jonathan Millar, the senior U.S. economist for Barclays. Unemployment benefits applications dropped to the lowest level since February – decreasing by 13,000 to 216,000, well under levels projected by Bloomberg.

Though it may be “achingly gradual”, we are still trending towards a slowdown. July’s downward revision was at least partially attributed to some unexpected events like the SAG-AFTRA strike in Hollywood and trucking industry layoffs following the bankruptcy of Yellow Corp. Some of the trucking slowdown is also a post-COVID industry right-sizing as transportation grew to serve stay-at-home shopping and has now contracted over time.

Hiring demand is also ​​diminishing, primarily due to companies electing to reduce the number of open positions rather than enacting layoffs. With a decrease in job openings in the US alongside an uptick in job seeker search activity, we are clearly moving towards labor market softening. According to LinkedIn, hiring in the US declined across almost all industries in August 2023, dropping 3.6% over July. Pascal Michaillat, an economist at the University of California, Santa Cruz, measures labor market tightness by comparing job vacancies with the number of unemployed: in a balanced market, these numbers should be equal. The ratio fell to 1.4 in August from 1.6 in July, indicating a labor market that has loosened but remains uncomfortably snug.

So how do people actually feel about the economy? The reality has been a somewhat complicated about-face over the last several months. A year ago when fears of recession were at a fever pitch (cheekily dubbed the “vibecession”), some asked: could our negative talk actually manifest a recession? Reflecting on today, we might find that the opposite is true and perhaps we might be talking ourselves out of a recession. There’s evidence that firms are more concerned about being unprepared for an economic boom than they are a downturn. If that’s a good assumption, then we should see companies hold onto both workers and goods, a phenomenon that should hold off any sustained downturn.

An alternate possibility is that decreased hiring is just the first stage of weakness: labor hoarding also has a tendency to disguise labor market vulnerability. As banks have made lending terms more rigorous, American debt is also increasing. Many student loan repayments resume in October, and there’s still uncertainty over the ultimate lasting impact of the Fed series of rate hikes. If the durability of the American consumer fails, layoffs could increase rapidly.

And just when we think things couldn’t get more odd – there’s even a possibility that the economy slows or even shrinks, all with employment remaining low. “It never happened before[…] (b)ut theoretically it is possible, and I think now it is as close as we ever got to it” noted Gad Levanon, the Burning Glass Institute’s chief economist.