As to the commentary, I’d summarize (in wildly over-simplified fashion) our observations since the pandemic cataclysm, divided into into two distinct phases, as follows (and please feel free to read past posts if you doubt the validity of the summary):
Phase 1 - Supply Shock - March 2020 - February 2022
The pandemic and resulting quarantine dealt a massive supply shock to the economy by obliterating the supply of workers who couldn’t perform their roles remotely which quickly resulted in the decimation of the supply of both goods and services. Massive, seemingly insatiable demand for goods with no supply resulted in significant inflation which was exacerbated by the war in Ukraine and aggressive but appropriate fiscal and monetary policy.
As vaccines began rolling out, people very slowly began returning to work but with a vastly and fundamentally (and we’d argue permanently) altered perspective on life in general and work in particular, thus beginning the ‘Great Resignation’ and a protracted dearth of workers willing to return to their old jobs, their old employers, their old salaries, or the old, pre-pandemic world where the balance between employers and employees was massively skewed in favor employers.
So as the economy slowly opened up in fits and starts, demand for goods remained strong while demand for services skyrocketed, and the ‘bid-ask’ spread between employers and employees reached unprecedented levels.
Companies reacted to this bid-ask spread very quickly by raising wages, acquiescing to remote work, ceding to every single demand put forward by employees and job candidates, and generally accommodating anything and everything needed to get people back to work to meet the overwhelming demand of U.S. consumers.
Of course this happened in fits and starts and played out over a year or so, but the end result was a combination of rising wages, rising inflation, rising employment and labor force participation, rising corporate profits, and the fastest recovery in the world.
Phase 2 - Fed Achieves a Soft Landing - March 2022 - June 2023
To tame inflation and cool down the economy, the Fed began aggressively hiking rates in March of 2022 and while those hikes began to gradually ripple through the economy, employers continued to hire aggressively to get employment levels where they needed to be to meet insatiable demand.
That aggressive hiring, combined with a slowly cooling economy and ebbing labor demand (as rate hikes took effect but also as things returned to ‘normal’ everywhere) and isolated but high-profile layoffs (mostly by large-cap tech but also by companies with weak business models), resulted in greater and greater equilibrium between supply and demand in the labor market and declining need to keep raising wages to fill openings (except in very specific parts of the economy).
In the 15 months since the Fed began hiking rates, inflation has dropped from 9% to 4%, the economy has added 4.5 million jobs, GDP growth has averaged 1.6% per quarter, and unemployment has remained at historic lows.
There is no way to label what has happened over the past 12 months as anything other than a soft landing, an outcome that virtually no one regarded as possible a year ago.
But even with all the evidence, there remains a cohort of pessimists and cranks that cling to the belief that a recession is imminent.
As Bloomberg noted recently (Why a US Recession Might Happen in Time for 2024 Election):
The US economy has proven resilient after more than a year’s worth of interest-rate hikes, with a steady drumbeat of recession predictions having been proven wrong. New data released this week continued to point away from a downturn. Still, some forecasters warn a recession might still be coming, and that it could coincide with the 2024 presidential election.
And from another economist who still sees recession storm clouds on the horizon, perpetually off in the distance, “The economy still is quite healthy and seems to have some momentum remaining. Our forecast is still for the economy to slip into a mild recession, but we think that’s going to come later than we previously thought.”
Equally as prevalent as the pessimists, cranks, Recession Truthers, and those who make exceedingly non-specific, irrelevant forecasts like the one above, are those who cannot make heads or tails of what’s going on in the job market (often citing ‘mixed signals’ or ‘conflicting data’) or mischaracterize a positive data point as negative, an ‘ominous’ sign of what’s to come.
This was particularly the case following last month’s jobs report when job growth came in higher than most people expected but unemployment rose a bit and hours work dropped.
On those two points and my own third, I’d offer the following:
• Unemployment can rise when more people move from the sidelines into the job market because they are compelled to seek a job because they need one or because the offer or ‘bid’ employers are making is sufficiently attractive
• As companies are now finally filling job openings that have been open for a long time, it’s only natural that they would reduce hours for their workers who have had to work far longer hours than normal through overtime and double shifts when labor was in such short supply and demand was extraordinarily high
• Wage inflation is tapering off in most areas of the economy because employers have already raised wages such that they have been able to fill the openings and no longer need to keep raising wages. Having said that, wages are still rising in certain sectors of the economies such as food service, leisure and hospitality, and other low-wage portions of the economy. Because these also happen to be among the largest sectors of the U.S. economy, even small wage gains there can have an outsized impact on overall wages across the economy - so volatility in wage inflation numbers might persist.
So with all of that, we can no pick up with Phase 3 and where we are today.
Phase 3 - What Will the Fed Do? - July 2023 - ??????
As we’ve noted in previous posts, we’d argue that the U.S. economy could hardly be in a more perfect place and that the Fed, having achieved the much sought-after soft landing, should do nothing except raise its long-term inflation target to a 3-4% range. Barring that (and given the low probability of that happening), we’d argue that at a minimum, the Fed should pause for at least few months to let its hiking regimen take full effect.
Not surprisingly, however, the Fed chair has signaled that at least two more rate hikes are likely in the months ahead, even as members of the FOMC voice uncertainty about what the Fed should do or advise that the Fed, at a minimum, hold tight for the time being.
And unfortunately, what happens with the economy in general and the labor market in particular is entirely dependent on what the Fed does going forward as far as rates are concerned. And given that we are not in the business of forecasting Fed policy at any point in time, but especially this most uncertain of moments, we’ll stick to forecasting non-farm payrolls for June.
And on that front, we suspect that if June’s payrolls come in as we expect (net gain of 310,000) we’ll see more shock and confoundment among the vast majority of economists, pundits, and commentariat.
Looking at our data for June, total job openings in the U.S. rose 0.4%, new openings rose 8.2%, and job openings removed from company websites jumped 16.0%.