Why is the economy still growing? Because most workers don't fear for their jobs.

By Jeffry Bartash

Strongest labor market in decades keeps recession at bay

How has the economy avoided recession despite high inflation and high interest rates? Most Americans, especially younger ones, aren't worried about losing their jobs.

"It has been a very long time since workers were worried about the labor market," wrote U.S. economist Thomas Simons of Jefferies in a new report.

Simons pointed out the economy has not suffered three straight months of job losses since 2010, when some 35% of the current labor force was under the age of 20. Younger workers simply haven't experienced wave after wave of layoffs like some older Americans.

How could that be? There's been a spate of big layoff announcements early this year, for example, and the tech industry has been roiled by job losses in the past few years.

The pandemic also saw the destruction of some 20 million jobs in just a few months, a bruising period for many households.

All true, but the labor market overall has shown remarkable resilience. Total layoffs have hovered at or near record lows for the past few years, for instance, and the unemployment rate remains near a 55-year low of 3.7%.

Highly publicized tech layoffs, meanwhile, haven't stopped total tech employment from continuing to rise to record levels.

Finally, the pandemic job losses happened in a two-month span and were followed by a sharp rebound in hiring and rehiring.

Of the 20.4 million jobs lost in March and April of 2020, some 12.1 million were recovered by the end of the year. And the rest of the lost jobs were almost entirely regained by the end of 2021, government statistics show.

The pandemic did leave a lasting effect, though: The worst labor shortage since World War II.

Many older people retired prematurely, immigration dried up for a few years and some people didn't return to the labor force for health reasons or family obligations.

The labor shortage made it very hard for companies whose businesses were growing to get fully staffed, giving workers the most leverage they've had in decades.

They've used that leverage to demand bigger pay increases or to quit in favor of other jobs that promised higher salaries.

Hourly wages have risen 4% to 5% a year since 2020 and helped to fuel more spending. Pay has risen even faster for job switchers, helping them to offset the ravages of high inflation.

Among the biggest beneficiaries were workers in industries such as retail, recreation, leisure and hospitality, and health-care assistance in which employment usually ebbed and flowed. They got higher pay and more job security.

In January, just 11% of Americans surveyed said jobs were "hard to get," according to the consumer-confidence survey. That's slightly higher than a 9.6% reading in March 2022, which matched the lowest level since World War II.

Companies are reluctant to lay off workers for fear they won't be able to find enough labor if the economy speeds up - a phenomenon economists call labor hoarding.

Hence a virtuous cycle of sorts.

Households keep spending because workers feel secure in their jobs and their pay is rising. And steady spending gives businesses little reason to lay off workers since they are still selling plenty of goods and services.

Indeed, consumers have continued to spend at surprisingly high levels even as their savings have dwindled and their debts have increased.

Can it last? Simons is not so sure.

On the one hand, "consumers can run with a low savings rate for as long as they are confident that they will remain employed and that they will continue to see wage gains," he wrote.

But things could change quickly, Simons doubts the Federal Reserve can get inflation back down to 2% unless the economy slows and unemployment rises, even if just modestly so.

Simons is far from a bear, though. Any slump or sharp slowdown in the economy is likely to prove short-lived, he said, once the Fed begins to cut interest rates.

"We will have a soft patch in the second half of 2024 as consumers catch their breath, and then a solid recovery in the first half of 2025," he wrote.

-Jeffry Bartash

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03-14-24 1420ET

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