with Taylor St. Germain


A tight labor market continues to plague businesses, but when can we expect things to change? Join us for a new episode of TrendsTalk as ITR Economist Taylor St. Germain breaks down the key trends in the US Private Sector Employment data.



The below transcript is a literal translation of the podcast audio that has been machine generated by Rev.

Hi everyone, my name’s Taylor St. Germain with ITR Economics and welcome to this edition of Trends Talk. Today I wanted to update everyone in the labor market, what we’re seeing from employment. We forecast US private sector employment. I know a lot of times folks are focused on the unemployment rate. We like to focus on those that are employed, especially as we look at the way a dataset like private sector employment correlates with the economy. Now, one important thing to note before we start today employment’s a lagging indicator. Employment lags behind the economy, whether you’re looking at GDP, whether you’re looking at US industrial production, it’s important to note that employment lags. And the reason I say that is oftentimes in the media we see folks evaluating employment and suggesting that it’s a future indication of where the economy is headed. And through our correlative analysis, through our trend analysis, we know that that is incorrect.

Employment is a lagging indicator to the economy. Now, I don’t want to downplay the importance of understanding employment, the direction that it’s headed, where it’s going in the future and in future years, because it has major implications for the economy and all of our businesses, but not in terms of a forward-looking indicator. We have several other of those that we’ve talked about on the podcast here in the past. So let’s get into some employment data, especially as we got some new employment numbers. We now have the November employment data. As I said, we refer to US private sector employment when evaluating the US employment situation. It’s one of our trends report series. So if you’re familiar with the trends report, you can look at that core module of the trends report, and you’ll find this forecast in there. But I wanted to call out some of the most recent data, specifically that November data, whether you’re looking at the monthly value, the 3-month moving average or the 12-month moving average, all of those data points for November came in at a record high.

So we have record high US private sector employment as we sit here today that highlights this tight labor market, and we’ll talk a little bit more about the tightness of the labor market as we go. But on previous episodes we’ve talked about these ratios and how tight the labor market is today. So even though the economy is slowing down and there’s even some areas of the economy that have crossed below zero and entered a recession, you still see higher levels of employment. Now, again, employment’s lagging as I had mentioned, so we won’t see some of that downside that’s showing up in some of the longer leading indicators until we progress into 2024. But as we stand here today, again, whether you’re looking at the monthly value 3-month moving average, 12-month moving average for November, 2023, all came in at record highs. However, and this is an important lesson in looking at rates of change, if you look at the pace of growth for US private sector employment, those growth rates are not at record highs.

And that’s why it’s so important to understand, not just moving averages or moving totals and monthly values, it’s important to calculate rates of change because the rates of change will let us know the direction in which those moving averages and moving totals are headed. And as we sit here today, we’ve continued to see the month over month, the quarter over quarter or the year over year, the 1/12, 3/12 or 12/12, all of these growth rates continue to decline. Now, they’re not negative, they’re just declining and that highlights that we’re growing at a slowing pace. So even though we see these record high monthly values coming in, it’s important to note that the labor market is growing, but it’s growing at a pace that’s much slower than where we were at last year. And now that’s really important for us to understand because those rates of change, again, have a lead time to the moving totals and they tell us where we’re going.

And as we look ahead to 2024, even though those rates of change are positive as we sit here today, we do expect those rates of change to go mildly negative next year. So let me give you some numbers to reference, if you look at the annual growth rate for private sector employment with that November data, we came out at a positive 2.5%. Now that’s down from the positive, about 6.5% that we saw in the first quarter of 2022. So we saw a peak in that annual growth rate in 1-Q ’22, and we’ve been slowing down ever since, now we’re sitting at 2.5% with that latest reading today. As we look forward to 2024, we see that growth rate turning negative. If you look at the full year of 2024 compared to the full year of 2023, we actually expect private sector employment to come in negative, down just 0.3%.

So we’re not talking any significant downturn here, but a little bit of loosening in that labor market. Now, I want to be very careful saying that because it’s not that this tight labor market is going away. Yes, there’s some mild negativity for next year, but like I said, only down 0.3% off values that are record highs this year. So I think that does highlight that yes, there might be a few more folks available out there to hire in 2024 as the economy grips with the mild recession, and businesses are challenged by some declining financials next year, but it’s not that all of a sudden this large pool of labor is going to become available. And so that’s why it’s really important as we think about 2024, retaining employees and even bringing on some additional employees to prepare for the growth in the economy that we have projected in ’25 and ’26, will be very important as we sit here today.

The labor market, again, remains tight. There’s about eight job openings for every five unemployed people, so that’s what’s really important to note. Yes, mild decline, very mild decline, essentially flat next year in terms of private sector employment, and that characterizes the fact that this tight labor market is ultimately here to stay. So like I said, will there be a few more people available to hire? There sure will. However, again, it’s not this big pool of labor that’s all of a sudden becoming available. So there will be some opportunities to capture some additional employees, some high top-level talent next year from maybe competitors that weren’t prepared for the 2024 recession. But it’s important that we focus on the retention of our existing labor force because this labor market is going to remain tight. 0.3% down in 2024 is not a significant labor market recession. And so it’s going to be really important that we focus on retention.

A couple of other things that I’d just like to call out. We look at temporary labor a lot as it relates to the macroeconomic situation, and that’s because there’s more sensitivity in temporary labor. And when you look at some of the permanent employment positions, as the economy slows down and some firms find themselves with excess capacity, they’re less likely to need additional help from temp workers. And that’s some of what we’re already seeing here today. It’s also important to note that demographic trends continue to contribute to this tight labor market. There’s a large baby boomer generation that’s retiring and is going to continue to be retiring en masse as we look at the next five to seven years. And so because the baby boomers are such a large generation exiting the workforce, that’s another reason for this tight labor market that we’re really expecting to characterize the next five to six years.

So record highs in US private sector employment as we sit here today, although the rates of change are slowing, we have some decline in 2024, but it’s nothing significant. And so it’ll be very important that we look at our own employees in 2024 in doing what we need to do to retain them. So we’re prepared for growth in 25 and 26, and again, finding those areas of opportunity where there might be some industries adversely affected by 2024, where you might be able to capture some additional talent out of those industries that are hit harder by a recession next year. We’ll talk about what this means for wages on a future episode. It’ll be important to unpack the wage conversation as we prepare for ’24 and ’25 as well. I’ll have an additional episode coming on that. I hope you found this information helpful, my name’s Taylor St. Germain with the ITR economics. Thanks for joining me on this episode of Trends Talk, and we’ll see you on the next one.