by Jobs are roughly double the number of unemployed, meaning that to return to the 63.4% labor force participation rate of February 2020, before the pandemic, would require 2.8 million people to move into the labor force. The 1.4 million layoffs in July were about 23% below the 2019 average.
If there really is no slack in the labor market, then why are real wages falling? Adjusted for inflation, average hourly pay in August was down 2.1% this year, with the annual consumer price index up 8.2%. The many employers who tried to add employees are now reluctant to cut staff even as the economy slips out of concern that they may not be able to find workers when things turn around.
The recent weakness in productivity growth — and real declines in the first half of this year — adds fuel to the fire, as more hours of work are needed to produce the same output. In the first quarter, output per hour worked fell at an annual rate of 7.4% and by 4.1% in the second quarter.
Furthermore, immigration, which can replace native workers, has gradually slowed. From 2019 to 2021, annual immigration fell from 1.3 million to 505,000. Also, rapidly aging postwar baby boomers, ages 58 to 76, are leaving the labor force as they retire. The labor force participation rate for those aged 65 and over is 19.1%, compared to 82.8% for those of prime working age, 25 to 54.
My analysis shows that the current tightness in the labor market is not due to strong demand for workers, but because Americans are cutting supply after the pandemic. After staying at home for two years due to the lockdown, many people got used to working remotely and putting in fewer hours, while others gave up and took early retirement. At the end of September, office occupancy as measured by workers in physical offices was only 47.5% in early 2020, according to Kastle Systems.
Many switched to part-time work from full-time work. In August, 21 million worked part-time because they wanted to, while a declining number of part-timers — 4.1 million — wanted full-time jobs but were only offered part-time. Research from the Federal Reserve Bank of New York, among others, reveals that pandemic-induced changes in attitudes toward work, with men, women, young, middle-aged, full- and part-timers all wanting to work fewer hours than ,what before Covid-19 hit.
Consumers can maintain real spending in the face of falling real wages by liquidating assets, but this is not happening or likely. Much of the previous three rounds of pandemic-related federal fiscal stimulus in 2020 and 2021 focused on single-family homes as Americans left cities for suburban and rural areas and stocks.
But stock prices have fallen into a bear market and house prices are starting to decline. With mortgage rates rising, the cash-out refinance, which provided money for other spending, is history. Household net worth fell 4.1% in the second quarter as stocks and mutual funds fell, according to the Fed.
Borrowing is becoming more expensive, as evidenced by the rise in credit card interest rates from 16% in early March to 18% in September. Low levels of consumer confidence signal that Americans are too afraid to prop up the economy with too much spending, but instead are cutting back.
With all these forces weighing on consumers, who account for 68.4% of total output, it’s no surprise that real retail sales in August fell 4.4% from March 2021 and 1.2% since last November.
Unemployment lags the economy in business cycles. Only when business sales and profits decline do employers cut staff. And this time, as the recession I predicted unfolds, employers may be slower than usual to make the transition from hiring to firing. But it will happen.
In recent months, jobs have been falling and recruitment. So are attrition rates as workers begin to worry about finding new jobs. And the unemployment rate rose from 3.5% in July to 3.7% in August.
Don’t be surprised if labor market data quickly moves from feast to famine. This will put further downward pressure on corporate earnings and share prices. But it will curb inflation, to the benefit of US Treasuries. More from Bloomberg Opinion:
• Corporate bond doomsayers are a bit premature: Jonathan Levin
• The Moral Case for Higher Interest Rates: Ramesh Ponnuru
• Powell’s takeaway from Greenspan’s ‘Oasis’ speech: Daniel Moss
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Gary Shilling is president of A. Gary Shilling & Co., a consulting firm. He is the author, most recently, of The Age of Deveraging: Investment Strategies for a Decade of Slow Growth and Deflation and may have a stake in the areas he writes about.
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