New Data Heats Up Labor Market Debate: Hot or Cold?
In yesterday’s post, we noted that the predominant narrative of a strong labor market could change at any second. Just a day later and we’re already seeing that narrative shift.
According to data released by the Labor Department, initial unemployment claims in the US rose by 21,000 to 211,000 in the week ended March 4, marking the highest level since December.
The median estimate was 195,000 claims.
Small businesses with less than 20 employees have eliminated 594,000 jobs since December 2021, while firms with 20 to 49 workers shed jobs for a second-straight month in February, indicating growing financial pressure on smaller companies as the Federal Reserve hikes interest rates. Unlike bigger companies, small businesses can’t lock in fixed rates through the bond market.
According to Challenger Gray & Christmas, U.S. employers announced 77,770 job cuts in February, 410% higher than the 15,245 cuts announced a year ago.
Year-to-date, employers announced plans to cut 180,713 jobs, up 427% from the 34,309 cuts announced in the first two months of 2022. It’s the highest January-February total since 2009...
Challenger Gray & Christmas also found that companies announced plans to hire 28,830 workers in February, down 12% from the 32,764 hires announced in January. It is down 87% from the 215,127 hiring plans announced by companies in February 2022.
So far this year, companies announced plans to hire 61,594 workers, the lowest January-February total since 2016, when employers planned to hire just 15,901 workers in the first two months of the year.
“Certainly, employers are paying attention to rate increase plans from the Fed. Many have been planning for a downturn for months, cutting costs elsewhere. If things continue to cool, layoffs are typically the last piece in company cost-cutting strategies” - Andrew Challenger, SVP of Challenger, Gray & Christmas, Inc.
Per Bloomberg, the percentage of industries with a rise in claimants of more than 10% is ticking up.
As ZeroHedge pointed out, “Yes, we understand there are lags between the two series since the laid off are likely to be getting severance, but the fact that the claims data remains near record lows as layoffs are accelerating YTD at their fastest pace 'since Lehman' is ridiculous...”
As Bloomberg notes, the 90th percentile of the annual change in claims by US state captures regime shifts in the economy, and has recently risen sharply. Such moves preceded higher nationwide claims before the last two recessions (ex-2020).
In the event of worsening jobs data, the market’s reaction would likely start with widening credit spreads. In an economic slowdown, the costs associated with hiring new workers increase, which makes firms hesitant to fire employees quickly. This puts pressure on their cash flows, which affects their ability to pay back debt holders and causes credit spreads to widen.
If the company can manage to survive the slowdown, unemployment may not necessarily increase. However, if the slowdown worsens and turns into a recession, unemployment and credit spreads can become locked in a negative feedback loop, causing further economic damage.
Thanks for reading!