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A softer job market may be part of the price for ending runaway inflation.
Right now, the United States’ job market is still boiling hot with an unemployment rate (3.7%) that increased slightly in August, even as the country added 315,000 jobs.
Unfortunately, that might have to change if the country wants to rein in runaway inflation.
The US Federal Reserve gave a clear warning about that possibility in late August during a speech from Chairman Jerome Powell. The central bank is committed to raising benchmark interest rates so that inflation will return to 2%, even if that means a slower economy and a weaker job market.
“While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses,” Powell said. “These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.”
The chairman vowed to “keep at it until the job is done” because the longer the Fed takes to bring inflation under control, the higher the cost to the job market.
That approach still raises a question: If the rate hikes succeed in limiting runaway inflation and the economy takes a breather, just how much pain will the labor force feel? More layoffs? Fewer job openings?
If you follow the news, you’ve probably already seen the list of high-profile companies that have cut full-time staff and contractors as their businesses have encountered setbacks this year. The layoffs affect technology, finance, media, retail, e-commerce, manufacturing and other industries.
Between January and July 2022, US-based employers announced plans to eliminate about 159,000 jobs, according to global outplacement firm Challenger, Gray & Christmas.
But that was 31.3% less than the cuts made during the same period in 2021, though up 21.9% from the back half of last year. This year’s reductions have usually been in the hundreds, not the thousands.
“Job cut levels are nowhere near where they were in the 2001 and 2008 recessions right now, though they may be ticking up. If we’re in a recession, we have yet to feel it in the labor market,” said Andrew Challenger, senior vice president at Challenger, Gray & Christmas.
It’s possible that more job cuts are ahead. An August survey of US executives found that half of them either had already reduced their head count or had a plan to do so, according to PwC.
In addition, 52% were instituting hiring freezes, and 63% were updating their processes to require fewer people — by investing in automation. Others had either reduced or eliminated signing bonuses (46%) or rescinded job offers (44%).
“If we’re in a recession, we have yet to feel it in the labor market.”
The PwC survey led to a round of scary headlines – “Half of US companies plan layoffs” — but the full story is more complicated.
While many companies are prepared to cut staff, most executives in the PwC survey also realize talent acquisition and retention is still a huge problem. In fact, it was ranked second on the survey’s list of business risks by 81% of respondents.
Those executives probably remember how hard it was to find good employees over the last year and a half. Many of them may still be dealing with labor shortages. According to the U.S. Chamber of Commerce, there are more than 10 million job openings, but only about 6 million unemployed people.
So, while there are layoff plans, companies are also increasing compensation (64%), planning business acquisitions to obtain talent (53%) and recruiting former employees to rejoin them (50%).
Right now, business leaders should think about their “gates” for taking action on head count, said Chris Atkins, C2FO’s president of capital finance and capital markets. Namely, how bad would things need to get before your company was forced to take action and lay off staff?
It’s a difficult question to answer because economic conditions are so unpredictable. While layoffs are a traditional strategy during a recession, they might not make sense this time for all businesses.
“Let’s say we do dip into a recession, and it’s even a moderate recession – minus 3% on GDP,” Atkins said. “But instead of being nine to 12 months long, it’s three months long. Do you lay off people? Because when conditions improve, you’re going to need those people, and based on today’s labor market, there’s no guarantee that you’re going to find them again.”
If your company has sufficient resources to ride out short-term disruptions — something that C2FO can help with — you might even be able to use your staff to seize a greater market share. After all, some of the world’s biggest companies were founded during recessions.
Whatever path you choose, it’s useful to think about layoffs before you’re forced to react, so you can think through the problem with a calm mind, Atkins said.
He isn’t sure what the near future holds. Consumer spending is still strong enough that many businesses still feel there’s a financial benefit to adding positions. It’s possible the cost of labor hasn’t risen to meet true demand.
Fighting inflation is — and should be — job No. 1 for the economy right now. But it’s important to recognize that, if successful, those efforts may mean slower growth, which could translate to fewer job opportunities and more layoffs.
Smart business owners will start thinking now about the worst case scenario while also building (and retaining) a team with all the skills necessary for their business to succeed.
Wish your company had faster, fairer access to working capital? C2FO has a full suite of solutions for businesses like yours.
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