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Manufacturing is slowing, home sales are stagnant, and borrowing costs are rising rapidly. But a resilient labor market is supporting the economy against all odds.
The March jobs report, to be released on Friday, is expected to show the 27th straight month of solid job growth. And while the pace of job creation has slowed, three years into the coronavirus pandemic, the strength of the job market continues to confuse experts.
American workers and their purchasing power have propelled the US economy through incredible obstacles: a banking crisis that shut down three institutions and threatened broader financial instability; higher interest rates that have cooled the housing market and parts of the financial industry; sweeping layoffs in the tech industry, with major employers cutting more than 160,000 jobs in three months; and persistent inflation that has made groceries and rent much more expensive, especially for the nation’s most vulnerable.
“The labor market remains the pillar of the economy’s strength,” said Daniel Zhao, chief economist at Glassdoor. “Americans are busy, they get paychecks, which of course keeps consumer spending healthy and the rest of the economy running.”
Despite the economic headwinds, employers — many of whom are struggling to fill vacancies — continue to hire, or at least retain, workers even as business slows.
At Climax Packaging Machinery near Cincinnati, orders for beverage packaging machinery and other industrial equipment are down about 40 percent from a year ago. But owner Daryll Rardon said it’s become so difficult to find workers – particularly welders, machinists and electromechanical fitters – that he’s holding on to his 26 employees and actively recruiting new ones.
“Do I hoard workers? You could say it’s my fault,” he said. “If the right person came in today, we would hire them, although we don’t necessarily need them. I have never done that.”
According to Diane Swonk, chief economist at KPMG, employers’ propensity to retain workers even when the economy is slowing plays “a very important role” in supporting additional spending across the economy. The big question, she said, is how long employers can justify keeping extra workers on their payrolls when there’s a prolonged downturn in business.
“How long this ‘labour hoarding’ continues will test the resilience of the labor market,” Swonk said. “We just don’t know how much these patterns will shift: when will we go from hoarding to holding to cutting? How willing are companies to keep people even if demand falls?”
The picture is further complicated by the US Federal Reserve’s aggressive efforts to combat rapidly rising prices. The central bank has raised interest rates eight times in the last year – most recently in March – in hopes that higher borrowing costs will slow the economy enough to bring down inflation. Policymakers continue to point to the strong but flagging labor market as evidence their efforts are working without causing irreparable damage to the economy.
And while some of the country’s biggest employers, including Walmart, McDonald’s, Microsoft and Amazon, are laying off thousands, the broader economy continues to create hundreds of thousands of jobs a month. Small businesses account for the majority of these hires: 8 out of 10 new hires in February were at companies with fewer than 250 employees, Labor Department data shows.
These small businesses, which have struggled through much of the pandemic to compete with higher wages and better perks being offered by big companies, are reluctant to lay off workers. However, economists say this may not be sustainable over the long term, especially as higher interest rates find their way through the economy.
“We’re seeing labor hoarding today, but I’m concerned that these small businesses will also feel the biggest tightening in credit conditions,” Swonk said. “If these companies – especially younger firms – are wasting money and not being able to access lines of credit that they could have gotten a year ago, that could change the equation. How long can they afford to keep additional workers?”
Rardon, the business owner in Ohio, said orders fell sharply earlier this year. Customers still ask for quotes, but they wait weeks, sometimes months, before making a decision.
“People get nervous,” he says. “They worry about what interest rates are going to do, what the economy is going to do. They are really careful about how they spend their money.”
Although he would normally have responded by cutting staff or at least suspending hiring, Rardon said that was out of the question now. Instead, he’s raising wages, offering $500 in referral bonuses, and offering free pizza, pasta, and fried chicken on Fridays to keep his workers happy. (His biggest fear, he said, is losing her to General Electric, which has a manufacturing plant nearby. “They’re the 800-pound gorilla in our job market,” he said. “They can pay whatever they want , if they need people.”)
“It’s never been easy to get really good people, but it’s never been that hard,” he said. “People I would have let go 10 years ago are now getting second and third chances. It’s like, ‘Can you please get in shape? We can’t lose you.’”
In fact, the labor market remains tighter than usual in many respects. The number of job vacancies and the termination rate of workers had risen well above pre-pandemic levels in February. The number of redundancies fell slightly despite staff cuts at large companies. A lag in consumer demand and a higher percentage of adults staying out of work after pandemic lockdowns have kept the job market tighter than the Federal Reserve would like to ease inflation.
But there are also many signs that the labor market has weakened significantly since last spring. Wages rose 0.2 percent between January and February, a slower pace than for most of last year as more workers re-enter the labor market. Employment growth, while historically high, continues to decline. There were 9.9 million job vacancies in February, compared to 10.6 million in January. Meanwhile, the proportion of job postings promoting benefits such as health insurance, paid time off, and retirement plans has gradually leveled off, according to jobs site Indeed.
“The experiences of certain segments of the labor market are becoming increasingly different from others,” said Nick Bunker, economic research director at Indeed.
Some industries have started to retreat, particularly those that have swelled during the pandemic lockdown, such as information, transportation and warehousing. As Americans have redirected spending from goods to services and experiences, other industries have boomed.
Much of the strength of the labor market is being supported by job growth in the leisure, hospitality and public services sectors, which have still not reached pre-pandemic employment levels and have lost workers to other sectors.
Similarly, the healthcare industry continues to grow due to pent-up demand from the pandemic and an aging population. And many exhausted healthcare workers have quit, exacerbating the industry’s labor shortages.
Mayra Castaneda, 43, an ultrasound technologist at a Lynwood, Calif. hospital, said she’s seen many of her younger colleagues quit their jobs, cut hours or switch industries because of difficult working conditions and the numerous opportunities to earn higher salaries in less stressful fast food and retail jobs.
“We are severely understaffed. And if you don’t have enough staff to do the job, patient care is a blow,” Castaneda said. “Burnout and stress are the reality. You have to give up meals. You no longer have any relationship with your family.”
After 24 years at her job, Castaneda makes $60 an hour — far more than most of her peers. But she has still contemplated quitting her job because of the increasing stress and guilt that comes with caring for patients without adequate staff. “I hope there’s light at the end of the tunnel,” she said.
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