Key Takeaways

  • Despite constant fears of high inflation and news of layoffs, the October jobs report announced that 261,000 non-farm jobs were added.
  • The Fed has been watching the labor market because they’re looking for signs of slowing wage growth. This would be an indicator that the rate hikes are working, and Fed Chair Jerome Powell said rate increases should slow.
  • If wage growth doesn’t slow, the rate hikes will still likely continue in 2023.

The National Bureau of Economic Research (NREB) has not declared an official recession. Many experts believe that the resilient labor market is the reason why.

High inflation numbers have concerned many economists who feel that the aggressive rate hikes will tip the economy into a recession.

In the most recent update, jobless claims have fallen despite constant rumblings of layoffs and inflation fears. But what does this mean for the economy? We’ll try to decipher what’s happening and what you can expect moving forward.

Why are jobless claims significant?

Before we look at the present-day labor market, discussing the importance of jobless claims is essential. Jobless claims reveal the number of people who apply for unemployment insurance benefits during a week.

These numbers are reported weekly by the Department of Labor. There’s an initial jobless claim when someone files for the first time after losing their job. Then there’s a continuing claim when someone with an initial claim is still seeking unemployment benefits.

It’s worth recalling that jobless claims stayed at low levels since the initial loss of 20 million jobs when the pandemic started in March 2020. The Fed has been warning the public about how more job cuts could be on the horizon since the battle against inflation is being fought with persistent rate hikes.

Essentially, when the cost of borrowing money goes up, this forces employers to cut back on staff due to a decrease in consumer spending.

The central banks also believe that a slower rate of wage growth would put less pressure on employers to offer higher salaries. Currently, higher salaries are being passed on as increased costs to customers. In turn, this makes all goods and services more expensive.

As counterintuitive as it may seem, the Fed wants to slow inflation by cooling off the economy. When the economy cools off, wage growth will slow down too.

What’s happening with the labor market?

The Bureau of Labor Statistics shared the October labor figures and announced that 261,000 non-farm jobs were added during the month.

Since the jobs report is a vital indicator of the economy’s health, it was evident that the news took some by surprise. The figure for October was similar to the September jobs increase until the latter changed to 315,000.

Notable job gains occurred in manufacturing, professional and business services, and health care. The manufacturing sector added 32,000 jobs, business and professional services added 39,000 new jobs, and healthcare added 53,000 new jobs.

There were 1.9 open jobs for every unemployed person in September, so many laid-off workers are likely to find new work quickly instead of waiting for months.

Economists have indicated that companies not involved in technology, housing, and other industries sensitive to rate hikes have been hoarding workers. This is because they had many challenges finding staff after the pandemic restrictions loosened.

The data from the jobs report is one of the factors that the Fed will look over when they meet in December to discuss what’s next for monetary policy.

Soaring inflation concerns have led to fears of a recession

There have been fears of a potential recession resulting from these aggressive rate hikes that are happening in the battle against soaring inflation.

The biggest issue with the stubborn inflation numbers is that the Fed will continue tightening monetary policy to try to bring these numbers down. When the rates go up, there’s plenty of pain to be felt in the economy.

This pain is often felt in the form of job loss, which then hurts dictionary spending and leads to more unemployment as companies have to adjust staffing to meet the new demand levels.

As of this writing, we haven’t officially entered a recession. We will closely monitor how the labor market reacts to the rate hikes to see if there are any signs of the economy slowing down.

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Layoffs continue at major companies

We’ve been hearing about many big firms announcing layoffs and reductions in the workforce. While most of these tech companies experienced a massive boom during the pandemic, it appears that now they’re being forced to downsize as they’re sensitive to interest rate hikes.

This news about employee cuts had many experts concerned about what the jobless claims figures would look like. It’s believed that over 85,000 jobs have been cut in the tech industry already in 2022. Here are some of the notable layoffs:

  • Meta: 11,000
  • Coinbase: 1,100
  • Twitter: 3,700
  • Lyft: 13% of the workforce
  • Robinhood: 23% of the workforce

Many feared significant layoffs would be reflected in the jobs report. Some of these layoffs haven’t been reflected in the recent jobless claims because severance payments cover many tech workers.

Since high-growth companies in tech are often impacted the most by interest rate hikes due to consumer discretionary spending going down, we will be paying attention to see what happens if we enter a recession in 2023.

What’s next for the labor market?

The goal of the Fed was to create a soft landing for the economy so that we wouldn’t enter a full-blown recession. However, creating a soft landing by raising interest is difficult since unemployment rates also tend to rise when the rates go up.

When people are out of work, households will spend less since they don’t have the income coming in.

Here’s how the scenario would play out for a soft landing:

  • The economy heats up, and this causes the prices of everything to go up. With inflation at 7.7% for the year ending in October, it’s clear that we’re far from the 2% target.
  • The central banks raise rates to slow down the economy. With the Fed increasing the federal funds rate by 375 basis points in only eight months, it appears the most aggressive rate hike campaign in four decades is barely doing anything.
  • Prices of all goods and services return to a standard rate, and the economy has a soft landing.

It looks like the resilient labor market is keeping us out of a recession. However, the Fed wants to see proof that the rate hikes are slowing wage growth to determine if inflation is dropping.

If wage growth slows down, this will convince the Fed that the rate hikes did their job. In turn, we could avoid the significant job losses that would happen in an official recession.

The jobless claims reached a three-month high for the week ending on November 19. The initial claims for unemployment benefits went up 17,000 to a seasonally adjusted rate of 240,000 for the weekend ending on November 19.

According to economists, these numbers are only concerning once they exceed 270,000.

How should you be investing?

In the best of times, finding the right stocks to invest in can be challenging. During times of high inflation, knowing where to put your money becomes even more difficult since companies experiencing a boom last year are now laying off staff.

For a straightforward approach to investing your money, you can try Q.ai’s Inflation Kit. Q.ai takes the guesswork out of investing by using artificial intelligence (AI) to scour the markets for the best investments for all risk tolerances and economic situations.

You can activate Portfolio Protection anytime to protect your gains and reduce losses, no matter what industry you invest in.

Bottom Line

If the jobless claims continue to fall, there are concerns that interest rate hikes will continue. While it’s difficult to predict what’s next for the economy, we will continue observing the situation with inflation and unemployment figures to see the impact of rates going up.

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