For more than a year, central banks have aggressively tightened monetary policy in an effort to tame sky-high inflation. However, the job market has remained obstinately tight.
After the pandemic, supply chain bottlenecks gave way to gluts of goods and materials for manufacturers and merchants by the middle of 2022.
Once the delayed effect of tighter monetary policy takes root, Jeffrey Kleintop, chief global investment strategist at Charles Schwab, predicts a similar shift in the labor market later in 2023.
According to Kleintop, “Company communications on earnings calls and shareholder presentations reveal a rising trend of mentions of job cuts (including phrases like “reduction in force,” “layoffs,” “headcount reduction,” “employees furloughed,” “downsizing,” and “personnel reductions”) as well as a falling trend of mentions of labor shortages (including phrases like “labor shortages,” “inability to hire,” “difficulty in hiring,” “
Labor shortages have plagued global economies since the start of Covid-19 and exacerbated inflationary pressures, but economists anticipate that this trend will finally reverse itself this year.
This held true in April, despite recent instability in the financial industry and a slowing economy, according to last week’s U.S. jobs report. During the month, nonfarm payrolls rose by 253,000, and the unemployment rate reached its joint-lowest point since 1969.
Many advanced economies are affected by this tightness, and because core inflation is still high, experts disagree on when the Federal Reserve, the European Central Bank, and the Bank of England will be able to suspend, and finally lower, interest rates.
The Federal Reserve in the United States hinted this week that it would halt rate increases, but markets are still unsure of whether the central bank will need to raise rates even further in light of new data. In March, there were fewer job vacancies than they had been in almost two years.
Midway through 2022, as bottlenecks and a rebound of demand subsided, supply chain shortages that developed in the wake of the epidemic turned into gluts of goods and materials for merchants and manufacturers.
Data revealed that for the first time since mid-2021, terms referring to workforce reductions have begun to outnumber those relating to labor shortages in U.S. business results since the beginning of this year.
A “clear and intuitive leading relationship between banks’ lending standards and job growth” was noted by Kleintop as another factor contributing to a poorer jobs outlook. “The magnitude of the recent tightening in lending standards from U.S. and European banks points to a shift from job growth to job contraction in the coming quarters,” he said.
According to a report released by Moody’s on Friday, the key factor causing more reversals over the next three to four quarters will be a decline in labor demand, while rising borrowing rates for businesses and consumers will have a negative impact on hiring, consumer spending, and economic activity in the long run.
Due to a post-pandemic rise in demand, services employment growth has been a major driver of labor market resiliency in the face of global economic slowdown during the past year.
The purchasing managers’ index (PMI) gap between the recession-hit manufacturing sector and the services sector is at its largest point ever, according to Kleintop.
According to him, there may need to be a readjustment of the imbalance given the record-wide disparity between services growth and industrial contraction.
“If the lag effect of bank tightening begins to have more of an impact, it may be the strength in the services economy.”
This deterioration in the job market situation could be beneficial to central banks that have long expressed concern about how tight labor markets and rapid pay increases could fuel inflation in their individual countries.
According to Kleintop, it might enable policymakers to take a more dovish position, which would increase stocks.
However, he continued, “the change from labor market shortages to gluts may not be quick enough to substantially lower core inflation by year’s end, giving central banks the leeway to declare victory over the causes of inflation and start aggressive rate cuts.
Despite their agreement that labor shortages in advanced economies will ease this year, Moody’s strategists warned that they might return if significant policy changes aren’t made to increase the size and productivity of the labor force as population aging keeps workforces from growing.
According to the ratings agency, aging will cause a sharp drop in the supply of labor in most advanced economies, with South Korea, Germany, and the United States being most affected.
According to Moody’s projections of the labor supply lost to aging since the Covid epidemic, the upcoming pull will be “significant.”
According to Moody’s, aging in the U.S. is estimated to be the cause of roughly 70% of the 0.8 percentage point reduction in the labor force participation rate from the fourth quarter of 2019 to the present, which translates to a loss of 1.4 million workers.
This ‘demographic drag’ on participation rates has been particularly pronounced in the Eurozone, Germany, and Canada. Their recent demographic drain, however, has been able to be countered by peculiar elements and policy decisions in France, Australia, Korea, the euro region, and Japan, according to Moody’s strategists. Data collected since the turn of the century helped them identify countervailing elements, such as increases in female labor participation, migration, and advancements in technology and training.
