More Jobs, More Workers, Higher Unemployment

Michael Normyle – Nasdaq’s US Economist joins IBKR’s Jeff Praissman to discuss the labor market, wage growth, and what lies ahead for 2024.

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Summary – IBKR Podcasts Ep. 129

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman

Hi everyone, welcome to IBKR podcasts. I’m your host, Jeff Praissman. It’s my pleasure to welcome back to the IBKR podcast studio, Michael Normyle, Nasdaq’s US Economist. Welcome, Michael, how are you doing?

Michael Normyle

Doing well, thanks. Thanks for having me back. Glad to be here.

Jeff Praissman

It’s always a pleasure to have you in the IBKR studio for our monthly podcast. You and I, we’ve covered so many interesting economic topics and today is no exception as we’re going to discuss the labor market. I kind of want to, as we’re beginning 2024, I’d like to recap 2/23/2023 job market. Overall, the job market and the broader economy were expected to slow down, due to the feds aggressive interest rate hiking. However, it seems because of possibly strong consumer spending and an increase in available worker labor shortages, it actually receded a little bit. Is this across all industries or is it just concentrated in a few?

Michael Normyle

2023’s job market turned out to be much better, much better than expected coming into last year, where a lot of people were expecting recession, which would have ultimately seen job losses. And so instead, we ended up adding 2.7 million jobs in 2023, but somewhat surprisingly, even though we added 2.7 million jobs, the unemployment rate actually increased from 3.4% at the start of 2023 to 3.7% by the end of the year.  And that has to do, like you said, with more people joining the labor force.

And because we have more people joining labor force, then we gained jobs and that’s why we saw the unemployment rate increase. And so, there were there were two main drivers of this increase in labor supply. Number one is increased immigration. And the second is the return of prime age workers. And so, with the foreign-born share of the labor force, we saw that increase by 1.5 million people last year and for prime age or ages 25 to 54, it increased by 1.7 million. And so, for immigration, this was driven by an easing in immigration backlogs that had built up in the last few years.

For prime age workers, it was helped by increased workplace flexibility, which enabled more women to join or rejoin the labor force, along with strong wage growth which drew people back into the labor market. And so, we can’t exactly say if these gains were in specific sectors, but based on where we saw the job gains, you’d have to think a lot of them ended up in those sectors where we got the most job gains.  Specifically, 80% of job gains and job gains in 2023 were in just three sectors: education, healthcare, government, and leisure & hospitality.

Jeff Praissman

So that’s really interesting that more jobs were created, but then more people wanting to enter that job force, so like a rising tide lifts all waters. What do you think led to the increase of those of these industries?  And I know we’re really early in 2024, but how are they faring so far?

Michael Normyle

Well, so the interesting thing is that those 3 sectors that I mentioned, education and healthcare, government, and leisure & hospitality, they’re mostly non-cyclical, especially educational, healthcare and government. And so that means that the state of the economy doesn’t really govern their hiring and firing as much. So, for example, healthcare is more driven by the population aging.  And then the government, of course, is not profit driven, so it’s hiring isn’t tied to profitability in the same way it would be for a regular business.

But what we’ve seen with all three of these sectors is also its catch-up hiring from COVID. Healthcare and leisure & hospitality were among the hardest hit sectors with COVID and then government had a hard time hiring too, with less wage flexibility than private companies. So, when we saw really strong wage growth, the government couldn’t quite compete with those higher wages and they, you know, had missed out on hiring people. And so, there’s some catch-up from that.  I suspect that secular trends will keep driving healthcare and government hiring. But as leisure & hospitality gets closer to its kind of pre-COVID trend, cyclical dynamics should take over there. And I think that also applies to the broader job market too.

Jeff Praissman

Besides for those sectors, how is the overall labor market doing, how is it tracked?

Michael Normyle

Sure. I think the overall job market, it’s definitely cooled compared to where we’re coming in, you know a year ago, two years ago and so that’s why we’re seeing those job gains much more concentrated and we’re seeing a lot of different metrics for labor, the labor market has come back, some are back to kind of 2018-2019 levels at this point.

But we’ve seen a broad slowdown in hiring, but still seeing job gains and they’re pretty solid even compared to pre-COVID years. But in terms of how the labor market is tracked, there’s really two surveys that are used. We have the Establishment Survey, which is a survey of businesses. And the Household Survey, which of course is a survey of households. So, the Establishment Survey, it’s got a much larger sample, and it gives us a bit more confidence in their numbers and that provides the non-farm payroll numbers that we see reported in the news. The Household Survey gives us the unemployment rate.  So even though the Household Survey does include job gains numbers, the job gains that we see reported in the news are actually from the Establishment Survey and then the unemployment rate, that we see in the news, is from the Household Survey.

Jeff Praissman

What are the economists forecasting for 2024, as far as, wage growth and savings? Everything seems interconnected with the economy, and everything seems to kind of have an effect on each other.  So, kind of curious for that very specific thing we’re talking about today, just for wage growth and savings.

Michael Normyle

I think wage growth is expected to cool this year. It’s in response to those signs that the labor market is cooling. For example, if you look at the Quits Rate, which is the share of people quitting their jobs in a month out of all people that are employed. That’s fallen from a high of 3% down to 2.2%, which is back to the lowest readings it’s had since 2018, if you exclude the pandemic. And this is seen as a sign that people have less confidence in the labor market. Essentially, you’re not going to quit your job unless you’re confident that you can quit and find a new job pretty quickly, right?

And so, it tends to be a leading indicator of wage growth. And so right now it’s pointing to wage growth slowing to about 3 1/2% in year-over-year terms over the next six months or so, down from the 4 1/2% range now. But importantly, even if we see wage growth slow but inflation slows faster, then we’ll see positive real wage growth. And I think that’s what we’re expecting this year so that should help support spending and also improve savings as well.

Jeff Praissman

So overall, even if the wage growth is slowing, but as you said, the inflation growth is slowing as well, then would you say the labor market may slow then because of this? But economic growth may continue to kind of build on itself, sort of an accurate statement, as far as what may happen?

Michael Normyle

Yeah, I think that’s a fair way to put it. I don’t expect us to see a strong revival in the economy or the labor market this year. I’m expecting more that we see solid real wage growth that does enough to support spending and keep the labor market kind of chugging along in the economy too. But I expect that economic growth will be a bit weaker than it was last year. As the economy, it’s in kind of a post-COVID normalization phase right now, and so I think that kind of continues this year where we get back to more of a kind of normal numbers that we had seen prior to the pandemic.

Jeff Praissman

Are there risks to inflation, with all these potential changes that might be coming across between the end of 2023 and 2024?

Michael Normyle

I’m personally not too concerned what these changes mean for inflation because, of course, slowing wage growth will help bring down super core inflation. That’s the, you know, popular term for core services, excluding housing and that category of inflation. It’s mostly wage driven and that’s the one that the Fed has been particularly focused on because wages can be kind of “sticky” in the sense that they don’t adjust very quickly.

But I think the upside risk to inflation that we really see, it’s more from geopolitical kind of risks that we’ve been seeing. With the recent attacks on ships in the Red Sea, we’ve seen shipping costs double between late November to now and then oil prices were pushed up as well. And so those kinds of costs can get passed through to all sorts of different types of prices. But even still, I suspect that effect will be, you know, relatively modest.

Jeff Praissman

Over the past few years, we keep hearing about the dangers of recession, and for many of us, non-economists, it’s really the first time we’ve heard mention of the Sahm Rule Recession Indicator. What exactly is that? And you know, how is it calculated and what does it signify?

Yeah. So, the Sahm Rule, it’s an unemployment-based measure that has a track record of signaling recessions in the past. And so basically it states that if the three-month moving average of the unemployment rate increases 0.5 percentage points above its low over the last year, then that signals a recession. Either you know we are in a recession, or ones about to happen. So, it’s a bit wonky, where we’re looking at, you know, moving averages half a percentage point relative to the low over that, also kind of a one-year window that’s also moving. But right now, it’s at 0.2. So, well below that half a percentage point recession threshold. And importantly, even Claudia Sahm herself has emphasized that reaching this threshold does not guarantee a recession. It’s just something that has worked historically.

Jeff Praissman

You know, Michael, this was great. Are there any other thoughts you’d like to leave our listeners with on the labor market?

Michael Normyle

In the near term, the labor market is doing pretty well. It’s still pretty tight by a lot of metrics. So, we’re still undergoing that process of normalization that I was talking about earlier, which will take some time. And I think the longer-term issue, though that we’ll have to see, it’s maybe some of the labor shortages that we’ve seen since COVID may still linger as the population ages. And so, what we have to think about is how to address that and really that means two options. We can increase labor participation, or we can increase labor productivity. And so, in terms of labor force participation, that’s probably some policy prescription that maybe induces more people to join the labor force.  And then for productivity, a lot of people of course, their “go to” solution is AI, so you know, we’ll see what happens with that. You know it’s a challenge because the demographics are kind of set-in stone for a long time, but we’ll see how it plays out and that will ultimately have implications for wages and inflation which will then impact monetary policy. But that’s more of a longer-term kind of concern.

Jeff Praissman

Well, Michael once again, I want to thank you for coming by and joining us at the IBKR podcast studio. For more from Michael and NASDAQ, go under the education menu to view previous NASDAQ webinars as well as our previous podcasts with Michael. Thank you again for listening until next time, I’m Jeff Praissman with Interactive Brokers.