HomeBusinessLabor market still powering economy, as employers keep workers on

Labor market still powering economy, as employers keep workers on

Manufacturing is slowing, home sales are at a standstill, and borrowing costs are rapidly rising. But a resilient labor market is still propping up the economy against all odds.

The March jobs report, to be released Friday, is expected to show a 27th straight month of solid job growth. And while the pace of job creation has slowed, the strength of the labor market three years into the coronavirus pandemic continues to befuddle experts.

American workers, and their spending prowess, have driven the U.S. economy through incredible obstacles: a banking crisis that took down three institutions and threatened broader financial instability; higher interest rates that have chilled the housing market and parts of the financial industry; sweeping tech industry layoffs, with major employers cutting more than 160,000 jobs in three months; and persistent inflation that’s made groceries and rent much more expensive, particularly for the nation’s most vulnerable.

“The labor market remains the pillar of strength in the economy,” said Daniel Zhao, lead economist at Glassdoor. “Americans are employed, they’re getting paychecks, which of course keeps consumer spending healthy and keeps the rest of the economy running.”

The strong job market is becoming its own worst enemy

Despite the economic head winds, employers — many of whom have struggled to fill openings — are continuing to hire or at least keep the workers they do have, even as business slows.

At Climax Packaging Machinery near Cincinnati, orders for drink-packaging machines and other industrial equipment are down about 40 percent from a year ago. But owner Daryll Rardon said it has become so difficult to find workers — especially welders, machine operators and electromechanical assemblers — that he’s holding on to his 26 employees and actively recruiting new ones.

“Am I hoarding workers? You could say I’m guilty of that,” he said. “If the right person walked in the door today, we’d hire them even though we don’t necessarily need them. That is not something I’ve ever done before.”

Employers’ propensity to hold on to workers even as the economy slows is “playing a very strong role” in supporting extra spending throughout the economy, according to Diane Swonk, chief economist at KPMG. The big question, she said, is just how long employers can justify keeping extra workers on their payrolls if there is a sustained drop in business.

“How long this ‘labor 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 much are businesses willing to hold on to people even as demand wanes?”

The picture is being further complicated by the Federal Reserve’s aggressive efforts to tackle fast-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 slowing job market as proof that their efforts are working without causing irreparable harm to the economy.

And while some of the country’s largest employers, including Walmart, McDonald’s, Microsoft and Amazon, are laying off thousands, the broader economy continues to add hundreds of thousands of jobs a month. Small businesses are making the bulk of those hires: 8 in 10 new hires in February were at companies with fewer than 250 employees, Labor Department data show.

Those small businesses, which struggled to compete with higher pay and better perks offered by large corporations for much of the pandemic, are reluctant to let workers go. But economists say that might not be sustainable long-term, especially as higher interest rates work their way through the economy.

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“We’re seeing labor hoarding today, but I worry that these small businesses are also going to feel the biggest tightening of credit conditions,” Swonk said. “If these companies — especially younger firms — are blowing through cash and not getting access to credit lines they could’ve gotten a year ago, that could start to change the equation. How long can they afford to hold on to extra workers?”

Rardon, the business owner in Ohio, said new orders slowed precipitously early this year. Clients are still asking for quotes, but they are waiting weeks, sometimes months, to make a decision.

“People are getting nervous,” he said. “They’re worried what interest rates are going to do, what the economy is going to do. They are being really, really careful about how they spend their money.”

Although he would’ve ordinarily reacted by paring down staff — or at least pausing hiring — Rardon said that’s out of the question now. Instead, he’s boosting pay, offering $500 referral bonuses and providing free pizza, pasta and fried chicken on Fridays to keep his workers happy. (His biggest fear, he said, is losing them to General Electric, which has a manufacturing plant nearby. “They’re the 800-pound gorilla in our labor market,” he said. “They can pay whatever they want to pay if they need people.”)

“It’s never been easy to get really good people, but it’s never been this hard,” he said. “People who, 10 years ago, I would’ve let go, are getting second and third chances now. It’s like, ‘Can you please shape up? We can’t lose you.’”

Indeed, by many measures, the labor market remains tighter than usual. The number of job openings and the rate of workers quitting their jobs was elevated well above pre-pandemic levels in February. The number of layoffs decreased slightly, despite downsizing at major companies. A backlog of consumer demand and a higher percentage of adults staying out of the workforce coming out of pandemic lockdowns has kept the labor market tighter than the Federal Reserve would like to ease inflation.

But there are also plenty of signs that the job market has softened substantially since last spring. Wages rose by 0.2 percent between January and February, a slower pace than much of last year, as more workers reenter the labor market. Job growth, although historically high, continues to decline. There were 9.9 million job openings in February, down from 10.6 million in January. Meanwhile, the share of job postings that advertise benefits such as health insurance, paid time off and retirement plans has begun to level off, according to data from the jobs site Indeed.

McDonald’s closes corporate offices as it prepares for layoffs

“There is increasingly a disconnect between the experience of certain segments of the labor market versus others,” said Nick Bunker, economic research director at Indeed.

Some industries have begun to retreat, in particular those that swelled during pandemic lockdowns, such as the information, transportation and warehousing sectors. Meanwhile, as Americans have redirected spending from goods toward services and experiences, other industries have boomed.

Much of the labor market’s strength is being bolstered by job growth in leisure and hospitality and government, which still have not caught up with their pre-pandemic levels of employment, and have lost workers to other industries.

Restaurants can’t find workers because they’ve found better jobs

Similarly, the health-care industry continues to mushroom due to pent up demand from the pandemic and an aging population. And many exhausted health-care workers, have quit, exacerbating labor shortages in the industry.

Mayra Castaneda, 43, an ultrasound technologist at a hospital in Lynwood, Calif., said she’s seen many of her younger colleagues leave their jobs, cut back on hours, or switch industries because of difficult working conditions and the plentiful opportunities to earn higher starting wages in less stressful fast food and retail jobs.

“We’re severely understaffed. And if you don’t have enough staff to do the job, then patient care takes a hit,” Castaneda said. “Burnout and stress is the reality. You have to miss meals. You no longer have a relationship with your family.”

After 24 years in her job, Castaneda makes $60 an hour — much more than most of her colleagues. But she has still considered leaving her job because of the increasing burden and guilt that comes with caring for patients without adequate staff. “I’m hoping there’s some light at the end of the tunnel,” she said.

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