Why Are Companies Still Hiring When GDP Is Shrinking?

Many employers say they continue to struggle with staffing shortages

By Sarah Chaney Cambon of The WSJ. This ties in with Wedneday's post If there are jobless recoveries can there also be jobful recessions? (Okun’s Law & Creative Destruction). 

Excerpts from The WSJ article:

"Many employers say they continue to struggle with large staffing shortages that built up during the pandemic and are reluctant to cut head count. In many cases, they are still hiring. 

“I don’t think we’ll see mass layoffs,” said James Knightley, chief international economist at ING. “We are going to see companies prefer to hoard their labor rather than do a quick fire and then rehire because the challenges of hiring right now are incredibly intense.”"

"Some economists say the scars of the past year’s shortages—including the huge expenses of hiring and recruiting, combined with high employee turnover—could leave companies more hesitant to lay off workers if the economy falls into a mild recession. They contend that companies never fully met their hiring needs during the recovery and that businesses will likely pull openings, which are at historic highs, before they resort to cutting jobs.

“You can’t lay off what you didn’t hire,” said Ron Hetrick, senior economist at Lightcast, a labor-market analytics firm. There are “a number of industries out there that are like, ‘We’re still waiting to hire. We never even got to enjoy the party when it started.’ ”"

"Some large companies, including Goldman Sachs Group Inc., Wayfair Inc. and Snap Inc., have recently announced or signaled layoffs, but they are outnumbered by companies saying that labor shortages are crimping sales and production."

"Layoffs and other involuntary discharges, at 1.4 million in July, were about 20% below their average monthly level in 2019, when GDP was growing more quickly."

"At their meeting last week, Fed officials projected the unemployment rate would rise to 4.4% in the fourth quarter of next year, from 3.7% in August. The only times the rate has increased that much is in or around recessions—but it would be relatively small by historical standards. In post-World War II recessions, the unemployment rate rose an average of 3.8 percentage points, with a range of 1.5 points in 1980 to 11.2 points when Covid-19 hit in 2020.

Amy Crews Cutts, chief economist at AC Cutts & Associates LLC, forecasts a sharper rise in unemployment. She expects the jobless rate to exceed 5% by the end of next year. The Fed’s aggressive interest rate increases are likely to hurt demand and employment, starting with the housing market, she said.

Over the past seven decades, payrolls and economic output have typically fallen within two quarters of the start of a recession.

The 1973-75 recession was a notable exception. At the time, inflation was rising swiftly amid an oil-price shock, provoking the Fed to raise interest rates. The recession began in November 1973 as output declined, but employment kept growing and then held steady for a total of about a year. The job market eventually buckled, with payrolls declining by about 2.5% between October 1974 and the spring of 1975.

Today’s unusual labor landscape can in part be traced to decisions made at the start of the pandemic. Economists Robert J. Gordon and Hassan Sayed found that companies in sectors like construction, utilities and mining laid off too many workers during the 2020 lockdowns. With employment falling faster than sales, productivity—output per hour—jumped.  

As the economy reopened, the reverse occurred. Hiring outpaced sales, and productivity fell. That dynamic became especially acute this year. U.S. nonfarm labor productivity fell at a seasonally adjusted annual rate of 4.1% in the second quarter from the prior quarter, the Labor Department said. It followed a drop of 7.4% in the first quarter, the sharpest fall in more than 74 years."

"Employers are also coping with turnover. Nonfarm payrolls, which fell by nearly 22 million at the beginning of the pandemic, surpassed their prepandemic peak in August. That means monthly job growth is set to fade, according to economists. But even employers not seeking to raise head count have to keep hiring to fill vacancies caused by historically high rates of turnover. In July, 2.7% of workers quit their jobs, up from 2.3% in February 2020, when the jobless rate matched a half-century low."

"Businesses run the risk of hiring too many workers. Some large companies that bulked up their workforces in recent years are now seeking to downsize some of their operations."

"The tight labor market is a boon to workers. Job switchers reaped annual pay increases of 8.4% in August, averaged over three months, up from a 5.8% annual rise at the start of this year, according to the Federal Reserve Bank of Atlanta."

"Brisk wage gains ultimately might not last because they’re being fueled by tight labor markets. The Federal Reserve worries such high wages will keep inflation pressures elevated. 

Laurence Ball, an economics professor at Johns Hopkins University, expects the interest-rate increases to broadly hurt the labor market and economy in 2023, after the Fed’s initial rate increase in the spring.

William Spriggs, chief economist with the AFL-CIO, said the Fed’s interest-rate increases have already started to hurt parts of the labor market. The unemployment rate for Black workers has risen recently while their labor-force participation has declined. Further, the jobless rate increased in August among Hispanic workers, who are vulnerable to the construction slowdown, Mr. Spriggs said in a September panel on the employment outlook hosted by the Organization for Economic Cooperation and Development.

Mr. Spriggs expects the Fed’s continued rate increases will inflict further damage, undoing the widespread labor-market gains that stemmed from a historically fast rebound.

“This was the strongest recovery we’ve ever had,” Mr. Spriggs said. “The labor market is healthy, but what the Fed is doing right now is exceedingly dangerous.”"