June 30, 2023

Hello, everyone. I’m Michael Feuz, an economist here at ITR Economics, and welcome to another episode of Trends Talk. Recently, I’ve been out on the road traveling around talking to a lot of different business leaders and executives, and we’ve been getting a good handful of regularly recurring questions. One that has persistently come up and continually come up is the question around labor, where business leaders everywhere are asking, “Am I going to see any relief in the labor markets? How should I be planning for the next several years in regards to my labor capacity?” I wanted to address that with our time here today.

Just recently, last week we had the Federal Reserve come out and hold interest rates. One of the metrics the Federal Reserve likes to follow as well as use to gauge what they should do next is the unemployment rate. The May unemployment rate came in at 3.7%. Earlier in March, the Federal Reserve was estimating that we would reach a unemployment rate of 4.5%. They’ve been very stuck on at least 4% wanting to get to that number. They’ve recently lowered that expectation down to about 4.1%, but that’s still above 4% and certainly brings up the question, “Is that the right metric to chase?” While we are absolutely experience real substantial labor constraints.

I’ll leave it to that. Certainly tune in to Brian and his Fed Watch Talks. But in regards to what we’re seeing in the labor market currently, number of unemployed persons per job opening is a metric we look at often. What that is saying, folks that are unemployed that are actively looking for work. Right now, what we’re seeing is about for every one job there are .48 workers available. Now that doesn’t make a lot of sense, so to make more sense of that, I double it. For every two jobs there’s roughly one available worker. That’s certainly still labor constraints. If you look at that data over time, we’ve seen a continual downward trend since the great recession. Labor constraints have only gotten worse really over this past decade or so. For the last really since 2021, we’ve been hovering around that two to one ratio.

Now, in regards to job openings in America, especially on the industrial side, we’re still seeing very high levels. Manufacturing alone is sitting at roughly around 780,000 job openings. Construction sits around 380,000, but we’re getting softening. That manufacturing number of 780,000 is down from 900,000 a little over 12 months ago. That’s something the Federal Reserve wants to see, but we’re still seeing real labor constraints out there.

Now, how does that impact wages? You’ve probably have never paid more for your employees than you ever had. If we look at just manufacturing employees, their average hourly earnings are up four percent year over year. That’s substantial. It’s come down from 4.4, but that’s not really relief. That’s just less pressure and really nominal less pressure. We’ve seen really that 12 month moving average of hourly earnings has steadily risen.

I will throw out, right now we’re at a record level of total employment in the US. Just under 132 million people actively working. We’ve never had… That’s the highest employment has ever been. The idea that there are people just sitting on the sidelines is simply not true. What that means for you as business leaders is you’re going to continue to feel that upward pressure on wages that you’re going to have to pay to your employees.

Now, I do want to just caution you, while wages are certainly up or that hourly rate is up, we are admits this labor constraints. We are encouraging everyone we talk to certainly protect your labor. Pay those top employees, those A and B level employees, that extra dollar an hour if that’s what it takes to keep them. It’s certainly going to be more costly to lose them and go out and try to find someone and train them up to that level.

Be aware that while hourly rate is up, while real income is up, that weekly average earnings is starting to ease. This is very much due to companies actively pulling back on overtime, maybe pulling back on shifts as the economy slows. While they’ve never made more per hour, their weekly take-home is starting to ease. It’s really on a normalizing trend coming off that spike we saw over the past year. But that doesn’t mean that your workers aren’t feeling it. Just be sympathetic, empathetic to what your labor might be feeling.

Overall, you might have an advantage to do a little bit of hiring and improve your labor capacity next year during the downturn. We’re expecting a little bit easy unemployment, so this will be an opportunity for you to come in and maybe steal some top employees from your competitors who got laid off and you can prepare for that growth that we’re expecting to resume at some time in 2025.

Now, overall, labor constraints are going to continue. We expect it to persist throughout this decade. Just be aware to protect your labor, and if you need to plan on expanding your labor capacity going into 2025 when growth resumes in demand picks up after the slowdown next year, use the slowdown to expand that capacity and prepare to really take advantage of that growth. It’s great to always talk with you. I look forward to speaking with you again on the next TrendsTalk.