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Many people watching the economy — not just economists but also traders and business owners of all sizes — are getting nervous. Job hires were below expectations for the second month in a row and layoffs have taken a big jump. There are growing signs that labor market dynamics, which helped form the foundation of an expected soft landing of the economy after the high inflation bout, may now be on shaky ground.
How The Labor Market Interacts With The Economy
The labor market’s strength has been critical to the economic recovery. The Federal Reserve’s dual mandate is to achieve stable prices and maximum sustainable employment, as the Chicago branch of the Federal Reserve explains. It can be a difficult balance.
Maximum employment isn’t formulaic and can’t be readily calculated. And then, there is something called the natural rate of inflation that allows for economic growth and maximum employment, but that changes all the time. As with maximum employment, no one can definitively calculate it.
The two critical and unknowable numbers can be estimated, but that is similar to saying that a group of people is running an incredibly complex machine; however, the gauges that provide vital information don’t work well.
Labor is important in multiple ways. When companies employ too many people — remember, the Fed seeks maximum sustainable employment — costs rise and businesses pass them on through higher prices, adding to inflation and overheating the economy.
When those same companies lay off employees to save money, too few people have jobs. As unemployment grows, there is less consumer spending, which is almost 70% of gross domestic product or GDP, one way to measure the economy. The result eventually is a recession.
The Labor Market Trigger
When considering how to direct monetary policy, the Fed looks at both inflation and employment as rough gauges. In August 2024, Fed Chair Jerome Powell said at the annual Jackson Hole conference that inflation was coming under control but “the downside risks to employment have increased.”
The monthly job report has been slowing and coming below expectations. Numbers for February, released on Friday, March 7, were 151,000 new jobs. The consensus expectation of economists was 170,000. The January numbers, revised from the original report, were 125,000 when expectations were 169,000.
Because of the survey timing last month, the Trump administration’s major layoffs weren’t counted in the latest report, so the total results might have been much worse.
Layoffs Hit The Labor Market
Furthermore, the administration’s actions were a signal to corporations, which cut many jobs last month, according to outplacement consultancy Challenger, Gray & Christmas. U.S.-based employers announced 172,017 job cuts last month. That’s the highest February total since 2009 and the highest monthly total since July 2020, during the pandemic, when 272,649 jobs cuts were announced. So far this year, employers announced a total of 221,812 cuts, the largest year-to-date figure since 2009 during the Great Recession. These figures do incorporate government reductions.
Signs already show consumers overall have already pulled back on their spending and that half of that general amount comes from the top 10% of earners, indicating concern about the current environment and its stability. The labor market is showing strain and indicates that all is not well with the economy.