Why Are Companies Still Hiring When GDP Is Shrinking?
Many employers say they continue to struggle with staffing shortages
By Sarah Chaney Cambon
E.G. Construction in Bozeman, Mont., has bumped up pay for supervisors amid the labor shortage. LOUISE JOHNS FOR THE WALL STREET JOURNALA persistent economic puzzle is why labor is still so tight amid slowing growth, high inflation and growing fears of recession.
Gross domestic product growth slipped into negative territory in the first half of the year.
Borrowing costs have risen steeply as the Federal Reserve boosts interest rates in an attempt to reduce inflation.
Even so, monthly payrolls have grown an average of 438,000 from January through August, nearly three times their 2019 prepandemic pace.
Many employers say they continue to struggle with large staffing shortages that built up during the pandemic and are reluctant to cut head count.
In many cases, they are still hiring.
“I don’t think we’ll see mass layoffs,” said James Knightley, chief international economist at ING.
“We are going to see companies prefer to hoard their labor rather than do a quick fire and then rehire because the challenges of hiring right now are incredibly intense.”
In Eau Claire, Wis., Jim Fey normally buys five to eight new buses each year for his privately owned school bus service.
He doesn’t plan to purchase any in 2023 because high inflation and interest rates have put the price of a bus out of reach.
He worries about a recession.
“There’s going to be a lot of hurt,” he said.
Yet Mr. Fey is looking to add about 15 more school bus drivers to his staff of roughly 185.
He and some of his office employees have had to drive routes since the start of this school year due to a shortage.
“I can’t have my office staff out driving every single day,” he said.
Some economists say the scars of the past year’s shortages—including the huge expenses of hiring and recruiting, combined with high employee turnover—could leave companies more hesitant to lay off workers if the economy falls into a mild recession.
They contend that companies never fully met their hiring needs during the recovery and that businesses will likely pull openings, which are at historic highs, before they resort to cutting jobs.
The jobless rate has since declined, but there are far more openings now than during similar periods of low unemployment over the past two decades.
“You can’t lay off what you didn’t hire,” said Ron Hetrick, senior economist at Lightcast, a labor-market analytics firm.
There are “a number of industries out there that are like, ‘We’re still waiting to hire.
We never even got to enjoy the party when it started.’ ”
Some large companies, including Goldman Sachs Group Inc., Wayfair Inc. and Snap Inc., have recently announced or signaled layoffs, but they are outnumbered by companies saying that labor shortages are crimping sales and production.
Domino’s Pizza Inc. said same-store sales declined in the second quarter from a year earlier in part due to staffing shortages, which left some of the companies’ locations operating on shortened hours.
Layoffs and other involuntary discharges, at 1.4 million in July, were about 20% below their average monthly level in 2019, when GDP was growing more quickly.
Though openings still far exceed job seekers, the pace of hiring is likely to ease.
Federal Reserve Chairman Jerome Powell has said that the Fed’s moves to slow the economy enough to bring down inflation will inevitably mean some softening in the labor market.
At their meeting last week, Fed officials projected the unemployment rate would rise to 4.4% in the fourth quarter of next year, from 3.7% in August.
The only times the rate has increased that much is in or around recessions—but it would be relatively small by historical standards.
In post-World War II recessions, the unemployment rate rose an average of 3.8 percentage points, with a range of 1.5 points in 1980 to 11.2 points when Covid-19 hit in 2020.
A scarcity of applicants spurred Jim Fey to increase spending on marketing to attract potential drivers for his school bus service in Eau Claire, Wis./ PHOTO: JENN ACKERMAN FOR THE WALL STREET JOURNALAmy Crews Cutts, chief economist at AC Cutts & Associates LLC, forecasts a sharper rise in unemployment. She expects the jobless rate to exceed 5% by the end of next year.
The Fed’s aggressive interest rate increases are likely to hurt demand and employment, starting with the housing market, she said.
Over the past seven decades, payrolls and economic output have typically fallen within two quarters of the start of a recession.
The 1973-75 recession was a notable exception.
At the time, inflation was rising swiftly amid an oil-price shock, provoking the Fed to raise interest rates.
The recession began in November 1973 as output declined, but employment kept growing and then held steady for a total of about a year.
The job market eventually buckled, with payrolls declining by about 2.5% between October 1974 and the spring of 1975.
Today’s unusual labor landscape can in part be traced to decisions made at the start of the pandemic.
Economists Robert J. Gordon and Hassan Sayed found that companies in sectors like construction, utilities and mining laid off too many workers during the 2020 lockdowns.
With employment falling faster than sales, productivity—output per hour—jumped.
As the economy reopened, the reverse occurred.
Hiring outpaced sales, and productivity fell.
That dynamic became especially acute this year. U.S. nonfarm labor productivity fell at a seasonally adjusted annual rate of 4.1% in the second quarter from the prior quarter, the Labor Department said. It followed a drop of 7.4% in the first quarter, the sharpest fall in more than 74 years.
Arlington, Va.-based aerospace and defense conglomerate Raytheon Technologies Corp. lowered its sales forecasts for the year due to supply-chain and labor constraints that slowed production.
Workers in its supply chain have been slow to come back after layoffs early in the pandemic.
“Inflation is a challenge, but we can measure it.
We can work to overcome it.
Not having enough people in the supply chain—that has proven to be much more difficult,” chief executive Greg Hayes told analysts this summer.
“The only thing that’s going to solve labor availability, I hate to say this, is a slowdown in the economy because right now, there just simply aren’t enough people in the workforce for all of our suppliers.”
Employers are also coping with turnover.
Nonfarm payrolls, which fell by nearly 22 million at the beginning of the pandemic, surpassed their prepandemic peak in August.
That means monthly job growth is set to fade, according to economists.
But even employers not seeking to raise head count have to keep hiring to fill vacancies caused by historically high rates of turnover.
In July, 2.7% of workers quit their jobs, up from 2.3% in February 2020, when the jobless rate matched a half-century low.
Sales at beer distributor Dan Henry Distributing Company are down from 2021, but high attrition means the Lansing, Mich., company is employing between eight and 12 more people than it would normally need, said Kate Henry, co-owner of the 105-person company.
About half of new hires never show up, and of those that do, many disappear after a few hours, she said. Others last just days or weeks before quitting.
“We just keep hiring and replacing, hiring and replacing—wash, rinse, repeat,” said Ms. Henry.
“Efficiency goes to hell when you continuously hire since the person who is training them isn’t going at their normal pace because they’re stopping to explain things,” she said.
Many new hires leave before that training yields return, she added.
The company is spending the equivalent of a full-time employee’s salary on online ads for merchandising jobs, which require workers to lift 25 to 50 pounds filling store shelves and coolers with beer.
Construction industry layoffs are still below prepandemic levels, though new home sales have fallen sharply this year and housing starts have dropped because of higher mortgage rates.
Residential builders are struggling with the legacy of job cuts undertaken during the housing crisis of 2007-09, with employment in residential construction 12% below its 2006 peak.
New home inquiries and land sales to home buyers have slowed since this summer as prospective buyers face higher interest rates and an uncertain economic climate, said Eugene Graf, who owns a land development and custom home-building company in Bozeman, Mont.
Mr. Graf said his bigger concern is labor.
“The staffing shortages are causing the most challenges right now,” he said.
“We can plan for a slowdown. We can understand what each project in the future is going to take, but today’s staffing shortage is stressing everybody out.”
To retain workers, Mr. Graf has raised wages by about 15% over the past year for his superintendents who oversee projects, the biggest in-house pay bump he’s ever made.
‘We’d be hesitant to lay anybody off just because we still need to perform the contracts we have,’ said Eugene Graf. / PHOTO: LOUISE JOHNS FOR THE WALL STREET JOURNALMany of Mr. Graf’s subcontractors are short of workers.
A painting firm that normally runs with about 100 employees is down to 80.
An electrical contractor extended job offers to three workers and only one of them showed up to the job site on a recent Monday morning.
A granite installer lost about 15 employees because they couldn’t afford to stay in the area amid fast-rising housing costs.
“We’d be hesitant to lay anybody off just because we still need to perform the contracts we have,” Mr. Graf said.
Businesses run the risk of hiring too many workers.
Some large companies that bulked up their workforces in recent years are now seeking to downsize some of their operations.
Amazon.com Inc. said it is overstaffed in its warehouses.
Facebook parent Meta Platforms Inc. said it would sharply slow its hiring after more than doubling the size of its workforce since 2018.
The tight labor market is a boon to workers.
Job switchers reaped annual pay increases of 8.4% in August, averaged over three months, up from a 5.8% annual rise at the start of this year, according to the Federal Reserve Bank of Atlanta.
For much of last year, Angela Oehman was picking up Instacart and Uber gigs to supplement her income at a job selling safety-related products, including manuals and training.
This spring, after searching on job site Indeed.com, she landed a new role as a safety officer overseeing concrete-construction projects in Arizona.
Depending on her hours, Ms. Oehman, 45 years old, can make about $70,000 annually, up from roughly $50,000 in her previous job.
That’s given her a peace of mind about supporting herself and her daughter, a high-school senior.
“I don’t worry about: How am I going to pay for her ring?
How am I going to pay for her cap and gown?
What about her senior trip?” she said.
“I’ve been able to save.
Before, I couldn’t save.”
Still, she’s concerned about the economy, particularly given volatile gas prices and big cost increases for things like food and her modular home’s rental lot.
“You can’t keep raising prices on us and expect us to live,” she said.
Brisk wage gains ultimately might not last because they’re being fueled by tight labor markets.
The Federal Reserve worries such high wages will keep inflation pressures elevated.
Driver Tami Bradford prepares for her bus route in Eau Claire. / PHOTO: JENN ACKERMAN FOR THE WALL STREET JOURNALLaurence Ball, an economics professor at Johns Hopkins University, expects the interest-rate increases to broadly hurt the labor market and economy in 2023, after the Fed’s initial rate increase in the spring.
William Spriggs, chief economist with the AFL-CIO, said the Fed’s interest-rate increases have already started to hurt parts of the labor market.
The unemployment rate for Black workers has risen recently while their labor-force participation has declined.
Further, the jobless rate increased in August among Hispanic workers, who are vulnerable to the construction slowdown, Mr. Spriggs said in a September panel on the employment outlook hosted by the Organization for Economic Cooperation and Development.
Mr. Spriggs expects the Fed’s continued rate increases will inflict further damage, undoing the widespread labor-market gains that stemmed from a historically fast rebound.
“This was the strongest recovery we’ve ever had,” Mr. Spriggs said.
“The labor market is healthy, but what the Fed is doing right now is exceedingly dangerous.”
Gwynn Guilford contributed to this article.
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