2023 Quarter 4: Defying Expectations, The Labor Market Muscles Forward
It’s quite remarkable to consider the sheer magnitude the American consumer has on the U.S. economy. In fact, consumer spending drives roughly 68% of our nation’s total economic growth. Consumers that are optimistic in their job security tend to spend their money much more freely, which ultimately powers our economy forward. Any increases in consumer demand for goods and services must be accompanied by an increase in production and employees to meet that demand. For employees, this translates to rising wages and greater disposable income. For companies, economic growth means greater corporate profits.
In 2022, the U.S. economy averaged a highly robust 399,000 new jobs per month. By January 2023, the national unemployment rate had fallen to 3.4%, a 54-year low. Truly exceptional numbers. But the general consensus on Wall Street was that the economy, along with the labor market, would gradually weaken over the course of 2023. Even the Federal Reserve, America’s central bank, was expecting the unemployment rate to climb to 4.6% by year-end.
Despite the rather dire projections, the labor market has remained defiantly resilient. In September, the national unemployment rate held firm at 3.8% while the economy added 336,000 new jobs, up from August’s gain of 227,000. There are also roughly 9.6 million unfilled job openings across the nation. This is below the all-time high of 12.03 million set in March 2022 but still 23% higher than the February 2020 pre-pandemic level of 7.76 million.
To be fair, the pace of job growth has moderated. So far this year, the economy is averaging a solid 260,000 new jobs per month, 35% below 2022’s blistering pace of 399,000 per month. Since December 2022, the number of job openings has also declined by 1.65 million.
A 3.8% unemployment rate still conveys a strong demand by employers for qualified workers. This demand has kept employee wages high. In September, annual wage growth was reported at 4.2%. This is down from the 2022 average rate of 5.4% but still well above the 2019 pre-pandemic rate of just 3.3%.
The resiliency of the U.S. labor market, however, has not been equally distributed throughout the economy. At times, some economic sectors have fared better than others.
In early 2020, government mandates shuttered entire sections of the American economy, primarily the service industries, such as bars, restaurants, movie theaters, hotels and the travel industry. This created a transformational shift in consumer spending, labor and resources away from services and into physical goods. For the most part, Americans were stuck at home and they loaded up on recreational and sporting goods, hobbies and home and garden supplies to occupy their time. In February 2020, the Leisure & Hospitality sector employed about 17 million workers. Two months later, the Leisure & Hospitality sector had lost 50% of its labor force.
But as the economy reopened, consumer spending, labor and resources have shifted out of physical goods and back into services. Of the 2.339 million new jobs added so far this year, 2.13 million (91%) have been in service producing positions. Conversely, just 209,000 (9%) have been in goods producing positions.
Despite the labor market’s many successes this year, the struggle is not over. Many challenges remain and cracks in the armor are starting to appear. High inflation and rising interest rates stubbornly persist all while the risk of economic recession remains front-and-center. But without question, the labor market, so far, has certainly outperformed the expectations set at the start of the year.
Mark M. Grywacheski, Investment Advisor
Quad Cities Investment Group is a Registered Investment Adviser.
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