It is hard to believe that it has been 40 months since the start of the COVID pandemic which gripped the entire world. The virus threw us into uncharted territory in just about every aspect of life. (Take weddings, for example. Far fewer are being planned this year, as young people were not out and about meeting each other in 2020).
The normal business cycle was thrown out the window, and with it the predictability of what to expect next.
The current environment of very tight labor markets, high inflation and rising interest rates makes it a very difficult time to manage a corporation.
When we move toward the end of a business cycle and expecting a slowing economy, it is very common for corporations to trim the workforce in an effort to protect the profit margin. When the end of the economic cycle occurs and the economy moves into a recession, the unemployment rate moves up, wages fall and companies will only rehire employees when it becomes apparent the recession is coming to a close.
Interestingly, the economic cooling we have experienced, caused in large part by surging inflation, has not produced the normal reactions from corporate America.
- The labor market remains hot, with unemployment still just barely above a 54-year low.
- What’s more, many employers believe if they lay off a good employee in the current economy, other companies will gobble them up.
- So, not only are companies not firing people like they normally would, they are actually still adding to their staffs!
This is very unusual at this point in both the economic and Fed tightening cycles.
You can think of watching the labor market in three areas: job openings, average hourly hours worked and unemployment rate.
JOB OPENINGS
The first step a company would take would be to take down the help wanted sign. There are currently 10.1 million job openings in the U.S., well above pre-COVID levels. There are roughly two job openings for every unemployed American.
U.S. JOB OPENINGS AND LABOR TURNOVER SURVEY (JOLTS)
AVERAGE WEEKLY HOURS
Next, management would start to reduce the number of hours worked by current employees. The current weekly hours worked in the U.S. has dropped down to 33.3 from a high of 34 back in 2021, but the current level is right at pre-COVID average. It would make sense that weekly hours worked would fall before we saw any spike up in the unemployment rate.
US AVERAGE WORK WEEK
UNEMPLOYMENT RATE
Finally, you would see current employees start to lose their jobs. The latest unemployment reading of 3.7% is extremely low by any historical measure.
U.S. UNEMPLOYMENT RATE (%)
With these illustrations, it is easy to understand why companies are not willing to let good employees get away. They run the risk of not being able to replace them when the economic data returns to some sense of normalcy.
Thus, we have a hot new corporate trend of 2023: labor hoarding.
Almost all major corporations that are currently announcing layoffs are large, household names that feel confident that they will have the ability to rehire whenever they want to. Further, many, if not most, are in the highlight competitive technology sector where employees turnover is arguably greater and entrepreneurialism is greatest. Obviously, most companies, especially in so-called “old economy” sectors don’t feel they have that luxury.
As long as labor hoarding remains, one can expect a few hiccups to this business cycle and upcoming earnings seasons.
- First, profit margins will be lower, and this corporate earnings will not be quite as strong.
- Second, with more people employed during the economic downturn, the recession (if we even get one) will not be as deep or long. Even consumers with good jobs can pull back on spending when confidence in the economy dips, but they don’t pull back nearly as much as family with someone who just lost a job.
- Finally, when the economy starts to rebound, corporate profits should recover more quickly than normal. Businesses will not have to go out and rehire employees and train them. All of that time saved will result in the ability to ramp up productivity when needed with no delay.
Higher interest rates and the tight labor market, coupled with a cloudy outlook for the economy over the next few years, should result in a slowdown in new corporate expansion plans. That is if history serves as a guide, which it normally does. However, as I hope I have established, these aren’t normal times.
For the impact on the average American household, see our Consumer Response to the Current Economic Landscape, HERE.
For more from our Investment Committee in our 2nd Quarter 2023 Macro & Market Perspectives, click the image below.
The opinions expressed within this report are those of the Investment Committee as of the date published. They are subject to change without notice, and do not necessarily reflect the views of Oakworth Capital Bank, its directors, shareholders or employees.