April 2023 Labor Market and Economy Brief: The Good News No One Expected

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Economists are having a difficult time making predictions about this labor market—and history isn't doing them any favors.

People study history to understand how the past has shaped the present. Doing so helps predict future occurrences, even prevent them. Except history isn't proving very reliable in this labor market. For example, higher interest rates have historically resulted in higher unemployment and slower job growth as companies pause hiring and cut workers. But this labor market seems intent on carving its own path. Even as companies anticipated another rate hike by the Federal Reserve, they added 253,000 jobs in April and unemployment fell to 3.4 percent, tying a 54-year low.

Key Highlights:

• Unemployment among degreed workers fell to 1.9 percent.
• While layoffs increased slightly, low unemployment indicates workers are finding new opportunities quickly.
• Labor force participation continues to grow, particularly for prime age workers (83.3 percent), the highest rate the US has seen since 2008.
• Inflation inched down year-over-year to 4.9 percent in April.
• Wages increased 4.4 percent year-over-year. While pace of growth has slowed since last year, average earnings continue to grow at a faster rate than we saw pre-pandemic.

Employment Trends in Engineering and Sciences

1. Unemployed but not for long.
   While layoffs and separations were up slightly in March (1.8 million compared to February's 1.6 million), the low unemployment rate indicates that impacted workers had no trouble landing new opportunities. This is especially true for software developers, data scientists, and engineers who are landing new work with startups.
2. Demand for engineers and sciences workers continues to well outpace supply.
   Companies across multiple industries continue to struggle in finding skilled, degreed workers (1.9 percent unemployment rate). In fact, in a recent report run by Actalent's market analyst, there were 414,930 job postings for engineering and sciences workers in April 2023, but only 87,000 workers were available according to unemployment data. This reflects a 14 percent increase in demand over the previous month; an 87 percent increase in demand over the last five years.
3. Construction spending and employment are both close to record highs.
   Manufacturing construction spend grew 4.6 percent in March 2023, spurred in part by government funding and incentives (e.g., infrastructure projects and semiconductor and EV battery factories) and by companies that aren't dependent on loans (and their high interest rates) to fund projects. With this increased spending comes increased demand for construction and project managers, which are up 40 percent between January and April 2023.
4. Automaker Volkswagen invests billions in North America for EV plants.
   Citing the ease and lure of North American incentives for clean energy initiatives, as well as an interest in capturing a larger share of the US electric vehicle market, Volkswagen recently announced plans to shift production away from its home base in Europe and invest in US and Canadian opportunities instead. The $5 billion Canadian factory is slated as the company's largest factory yet, employing 3,000 workers to build battery-cells for its US factories. In March, Volkswagen also announced plans for a $2 billion dollar factory in South Carolina to build all-electric off-road vehicles.

Connecting the Dots

1. Are we moving toward a recession, or just leveling out?
   Between the effects of higher interest rates on companies' growth plans and profitability, along with a continued drop in demand for temporary help services, some economists are ringing recession alarm bells. Others, however, aren't convinced and point to moderation after years of rapid hiring. Our recent article, Are We Staring Down a Recession, or What? explains the complexity of the current economy and offers insight into the different factors impacting these outlooks. Regardless of whether you're on team recession or team moderation, there is consensus that this downturn won't last. A recent survey by Gartner indicates that CEOs continue to prioritize growth in 2023 and expect business to improve in 2024 and beyond, an outlook that's bolstered by massive investments in near- and re-shoring.
2. Upskill workers, or lay them off?
   This economy and labor market really are carving a new path. Historically, when profitability declines, layoffs increase. And while we've seen a slight uptick in the number of layoffs recently, employees are not staying unemployed for long, even as more workers return to the labor force. So once again, history isn't all that helpful right now, particularly given the massive investments to improve US infrastructure, boost green energy programs, improve digital capabilities in aerospace and defense, and strengthen supply chains via near- or re-shored manufacturing. Work can't happen without people. Therefore, companies choosing to lay off now risk coming up empty when the economy picks up later.
   
   On the other hand, new technology demands new skills, which has paved the way for reskilling and upskilling initiatives at many companies.  Even if they have the people, they're also ensuring their people have the right skills.
3. Wage growth overall is down, but job switchers still fare better.
   Wage growth was down in April, but it's higher for people who changed jobs than those who remained at jobs. According to ADP Research Institute, annual pay growth in April was 13.2 percent on the year for job switchers (down, however, from 14.2 percent in April 2022) compared to 6.7 percent growth for those who remained at their jobs. The report provides insights by industry, region, gender, age, and size of company. The fact that we're still experiencing high job quit rates in the same article we're pondering a recession proves that this economy and labor market isn't an easy one to predict.