Friday’s surprising U.S. January jobs number raised multiple questions about the status of the American and Canadian economies and the prospects for a recession in 2023. The figure of 517,000 non-farm jobs created in January was significantly higher than the market estimate of 187,000, and the job creation figures for the previous five months. Despite the ongoing series of Fed rate increases, unemployment fell to 3.4%, the lowest figure in 50 years. “Today’s jobs report is almost too good to be true,” wrote Julia Pollak, chief economist at ZipRecruiter. “Like $20 bills on the sidewalk and free lunches, falling inflation paired with falling unemployment is the stuff of economics fiction.”
Growth across a multitude of sectors helped propel the massive beat against the estimate. Leisure and hospitality added 128,000 jobs to lead all sectors. Other significant gainers were professional and business services (82,000), government (74,000) and health care (58,000). Retail was up 30,000 and construction added 25,000.
Reorganization of the New Economy
In a Sunday interview with Margaret Brennan, host of Face the Nation, Gary Cohen, Vice Chair of IBM, and former chief economic advisor to President Donald Trump, stated that these statistics point to a “reorganization of the new economy.” He expressed the view that the “service economy is regaining strength.” He noted that “the occupancy rate in offices in major cities is over fifty percent.” Service sector employees (parking attendants, restaurant workers) are needed to support workers in offices. Even though many employees are not returning to the office, 5 days a week, there is still a need for service industry employees to support them as they, and their colleagues, move from their dens to their offices, several days a week. It appears that as many people try to normalize their lives, as the pandemic crisis subsides, more hotel and airline personnel are also being hired.
Another remarkable element of the January jobs report was the vibrancy of the job market, In the U.S. there are currently 1.9 jobs for every person seeking a job. While much has been made of the hundreds of thousands of people laid off in the tech sector (e.g. Amazon, Meta, Microsoft etc.), the jobs report suggests that the vast majority of these people found jobs in other companies. Job openings are plentiful and there are many opportunities for people who wish to work. High unemployment is not triggering a recession.
Structural Changes
Some companies outside of the tech sector have issued layoff notices in anticipation of a recession. Jordyn Holman, a business reporter covering retail for The New York Times suggested last week that “while it’s not unusual for major retailers to announce store closings and some job cuts after the blitz of the holiday season, the recent spate of layoffs is more about structural changes as the industry recalibrates itself after the rapid growth from pandemic-fueled shopping. And it accompanies broader worries about the state of the U.S. economy and layoffs by prominent tech companies . . . Not all retailers are in a defensive crouch. For instance, Walmart announced this week that it was raising the minimum wage for its store employees in a bid to attract and retain workers in a tight labor market . . . When online spending was rising, many companies pushed to fill roles that could help them meet the demand. Now they have to adjust to a new reality”.
It is possible that some companies may rethink their layoff strategy. Bob Costello, Chief Economist of the American Trucking Associations, suggested last week that some businesses are not issuing layoffs since they are worried about being able to hire these employees back.
Gary Cohen stated that the net result of this data was that it is unlikely there will be a recession before Q3 or Q4. This contrasts with the thoughts of Bob Costello, who suggested last week that we could face a recession in Q1 or Q2. He noted that a “soft landing” is still possible and if we have a recession, it will be mild, short, and shallow. He pointed to the recession in housing and to a slowdown in manufacturing.
Inflation
There are encouraging signs. Upon releasing its latest global economic outlook on Monday, the International Monetary Fund noted it’s “less gloomy” than October’s forecast. Worldwide, inflation is expected to peak in the next two years, and GDP will grow by 2.9% in 2023. Inflation in the U.S. over the past six months, which was indeed very high last winter, was less than 2 percent at an annual rate.
How will Freight Demand Hold Up?
In a January 11 report issued by Stifel Transportation and Logistics Equity Research, “goods spend likely has further to fall and that’s clearly weighed on enthusiasm toward the sector. Increased savings are positive but incremental weakness could challenge a freight demand snapback.
We think these demand headwinds will be more pronounced for durables with non-durables potentially rebounding more quickly. Inventory ratios have normalized in recent months as retail sales growth slowed y/y. Data from large retailers indicates inventories are moderating, and we think that process will continue and new order activity could ultimately rebound later in 1H23. That resumption in order activity will be critical to a dry van spot rate recovery and that tends to foreshadow an ultimate freight rebound.”
Bob Costello identified the spending on U.S. infrastructure will also likely have benefits to the economy and freight productivity for years to come. He is optimistic about a rebound in the second half of 2023.
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