If the labor market remains tight, i.e. more jobs are available than workers, companies may feel pressure to continue increasing wages – which in turn is good for consumer spending, but on the other hand, all things equal, would weigh on company profits. With increased competition for an equal workforce, companies could turn to capex aiming for further gains through robotics and automation. While this is short-term negative, it will increase productivity and improve profits over time. Yet, there’s a risk that a decline in jobs could also bring down consumer spending.
Can the economy maintain a balance between the two?
There is mounting evidence that the labor market remains tight and pressure on companies to increase wages will continue to grow:
- Companies keep adding jobs. January’s non-farm payrolls blew past economists’ estimates, registering 353,000 jobs created versus the expected 185,000. Notably, in January, the unemployment rate remained at 3.7%, against estimates of 3.8%, and wage growth re-accelerated to 4.5% year over year, well above the 4.1% forecast.
- The overall workforce isn’t growing much. While immigration is progressing fast, recent metrics suggest less than 1% annual growth, compared with the 2% pace seen between January 2022 and December 2023. What’s more, the labor force participation rate (i.e., the percentage of all people of working age who are employed or actively seeking work) may be topping out, as the rate for the prime-age cohort—those between 25 and 54—is now 83.2%, a full percentage point above the pre-COVID average.
- More people are retiring. “Excess” retirements, or those above the predicted trend, hit a new record in the fourth quarter of last year, at over 2.5 million, or 1.5% of the labor force. Again, the immigrating workforce from Latin America and Asia is not covering the excess number of retirements. Research shows that many of them take up early retirement, aka after being highly active, there is a need to benefit from it.
On the other hand, there are also signs of a deleveraging in the labor market
- Corporations are deliberating about staff reductions, i.e. to occur via further automation and robotics. A Bloomberg analysis of corporate earnings call transcripts showed that references to “job cuts” have hit the highest level since the beginning of the COVID shutdowns in early 2020.
- Continuing jobless claims are grinding higher. The number of U.S. residents filing for ongoing unemployment benefits has risen from 1.806 million in the first week of 2024, to 1.895 million the week ended Feb 3.
- Immigration could drive new growth in the labor force. Foreign-born workers accounted for 18.6% of the U.S. workforce in January, or 29.8 million jobs, up 4% from a year ago. This population has an unemployment rate of 4.5%, versus the aggregate 3.7%.