Making sense of a confusing (but surprisingly strong) job market

Russell Price, Chief Economist – Ameriprise Financial

April 17, 2023

Layoff announcements have surged over the past several months, but they have yet to materialize in the form of broadly weaker job market conditions.

The U.S. economy generated 1.03 million net new jobs over the first three months of the year, and in January, the unemployment rate reached a 60+ year low of 3.4%, according to the Labor Department.

Let’s face it: The job market is not behaving the way it has historically — especially considering that the economy is supposedly so close to a recession.

So, let’s look at some of the most common questions regarding employment:

Why is the job market still so tight?

In the U.S. economy — and other major economies around the world — a growing number of people are reaching retirement age and exiting the job market. Younger generations are backfilling those positions. However, they have generally been smaller in number, thus slowly tightening the job market over time. Given demographics, we believe such trends are likely to continue for some time.

Have all the workers that left the job market during the pandemic returned?

That’s a tough question as it concerns individual motivations and actions. Here’s what we do know, according to Labor Department data:

• The job market was tight before the pandemic arrived, as indicated by the February 2020 unemployment rate of 3.5%.
• There were 2.1 million more people employed in the U.S. in March 2023 relative to February 2020.
• Labor force participation rates for older age groups remain below their pre-pandemic levels. Participation rates for older age segments had been at record highs, but these workers have been slow to return post-pandemic, particularly given their greater health risks. 

Is the Fed trying to increase the unemployment rate?

Over the last year, Federal Reserve officials have increased their main overnight lending rate by 5.0%. Higher interest rates are meant to slow the economy, thus reducing inflation pressures. Higher unemployment is an unfortunate consequence, but the negative effect of inflation on consumer spending power is even worse.

Additionally, through February, most of the remaining inflation pressures seen in the economy are in the services sector, where labor costs are the primary influence on prices. Most indicators show wage inflation across the economy to be easing, but wage gains are still strong, and they typically lag broader inflation measures.

Given the current environment, what’s your unemployment rate forecast?

We forecast the unemployment rate to rise moderately in the quarters ahead but likely remain below 5.0%. 

What might happen to the job market if a recession materializes?

The odds of a recession occurring at some point over the next several quarters recently increased due to the emergence of banking sector stress. Although we believe the banking system remains sound, lenders are likely to be more judicious with their lending over the intermediate term, thus hurting growth prospects modestly.

Should the U.S. economy slip into recession, however, we believe it would be relatively shallow.  Additionally, many businesses, especially mid-sized and smaller firms, appear to be holding on to their workers more tightly than usual given the labor market’s ongoing tightness. As such, we believe the unemployment rate would likely remain under 5.0% even if the economy enters a downturn.

There seems to be a significant increase in layoff announcements. Why aren’t these reflected in the job market data?