The US economy has slowed since the last year. Resultantly, large companies such as Amazon, Dell, and Disney announced layoffs. The odds of a recession are also increasing. However, the labor market remains tight, and companies are still hiring, making it challenging to find workers. The current unemployment rate is the lowest it has been in 54 years. New applications for jobless benefits are near record lows.
How the job market is going strong?
Despite some businesses letting go of workers, many opt to reduce their hours and retain them on the payroll instead of resorting to layoffs. This practice is known as labor hoarding. Companies are cutting jobs only when they have few or no options, avoiding mass layoffs.
One reason is that business leaders believe that the economy may improve later in the year, especially if Europe and Asia continue to rebound. The scarcity of labor is another significant factor. Companies have struggled to hire, making them hesitant to lay off workers who were difficult to find in the first place.
The shrinking potential talent pool in highly skilled occupations, such as manufacturing, has been a long-standing trend. Even service-oriented businesses that rely on less skilled labor, such as retailers and restaurants, face tremendous pressure to fill open jobs and maintain their current level of employment.
Employment in retail, leisure, and hospitality has yet to return to pre-pandemic levels. The US population has grown by several million, and demand for such services has climbed to a record high.
The pressure to add workers is still there, as evidenced by a recent announcement by Home Depot. Despite cutting its profit projections, Amazon plans to invest $1 billion in wages and benefits next year. However, companies will eventually resort to layoffs if sales fall sharply enough and earnings soften. Since the beginning of 2023, several technology companies have announced job cuts totaling more than 120,000 positions.
Most of the laid-off workers have not registered for unemployment benefits. It is unclear whether they are relying on generous severance packages or finding new jobs quickly. This leaves some observers puzzled about the state of the labor market. Regardless, few economists predict the unemployment rate will rise above 4% in the next year or two.
Fed’s take on the strong job market
Senior Federal Reserve officials view the strong job market as a buffer against potential recession. They raise US interest rates to combat high inflation. The tight labor market has resulted in the fastest wage growth in four decades. This raises concerns about the wage-price spiral that complicates the Fed’s inflation control efforts.
The optimal outcome for the Fed is to slow down the economy enough to quell inflation while avoiding large-scale layoffs. However, economists predict this will be unlikely to occur, and the “Goldilocks” economy, where everything is just right, will unlikely reign supreme on Wall Street for much longer.
The Fed hopes to slow down the economy. This will help to curb inflation. But the Fed also wants to avoid mass layoffs. Achieving this balance is the best-case scenario. Nonetheless, economists warn that this scenario is unlikely to persist for an extended period.