Hiring boom likely to slow, starting with May jobs report. But that may be a good thing.
Several forces are combining to curb the big job gains.
- Employers have added at least 400,000 jobs a month for the past year.
- The May jobs report could show a slow down in those gains.
- That slowdown may signal that an overheated economy struggling with high inflation is cooling down.
The job growth party isn’t over – but it’s starting to simmer down.
Employers have added at least 400,000 jobs a month for the past year, the longest such streak on record, providing lots of opportunities for people laid off in the pandemic-induced recession and those seeking higher-paying positions.
But the report on May's labor market, due out Friday, could reveal the start of a slowdown. Economists predict job gains of 325,000, according to a median estimate of those surveyed.
That total would still be robust by historical standards – and the Labor Department could report a higher number..
But a slowdown is coming. Payroll processor ADP said Thursday that businesses added just 128,000 jobs in May – its lowest count since February 2020 – though its report often varies significantly from the Labor Department's tally of public and private-sector gains. Average monthly payroll additions could fall to 261,000 by summer and 205,000 by fall, Moody's Analytics predicts. And some analysts forecast an even bigger downshift, to just over 100,000 by the end of the year.
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Several forces are coalescing to temper the gains, including a slowing economy, a lingering shortage of workers and U.S. employment that’s fast approaching its pre-pandemic level after shedding 22 million jobs in the spring of 2020.
And it’s probably not a bad thing.
With inflation near a 40-year high, “The Federal Reserve … wants to see things slow down” as it aggressively raises interest rates to restrain wage and price increases, says Brian Bethune, an economics professor at Boston College. Higher rates discourage borrowing, which dampens economic activity and job growth.
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Is the job market still hot?
There are already some signs of a cooling market. In April, job openings came off their all-time highs, though they remained elevated. Initial claims for unemployment benefits – a gauge of layoffs – are historically low but have creeped above 200,000 in recent weeks for the first time since February. And 47% of small businesses said they had positions they couldn’t fill in April, down from 51% in September, according to a survey by the National Federation of Independent Business.
So what's behind the projected slowdown, and why isn't it bad?
Gas prices, interest rates hurt consumer spending
Even before inflation took off a year ago, experts expected job gains and the economy to moderate in 2022. After all, government stimulus, such as big checks to households, largely have ended. And the economy’s initial bounce-back from the COVID-19 recession was set to decelerate after a record 6.7 million jobs were added last year.
Now compounding those challenges are soaring prices for gasoline, rent, food and other items, Bethune says, largely as a result of supply chain troubles and Russia’s war in Ukraine. That has led many people to rein in some of their spending – particularly on TVs, appliances and furniture – even as they resume traveling, going to shows and other activities.
Add to the mix interest rate hikes that began in March and are expected to continue through the year, bumping up the cost of borrowing for mortgages, car loans, credit cards and other types of debt.
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Economists expect gross domestic product to grow 2.6% this year, down from a 37-year high of 5.7% in 2021, according to the average estimate of those surveyed in May by Wolters Kluwer Blue Chip Economic Indicators.
Fewer Americans return to the jobs market
The share of adults working or looking for jobs has increased over the past year, from 61.6% to 62.2% in April, though it remains well below its pre-COVID mark of 63.4%. Many people who were fearful of COVID-19, caring for sick relatives or whose income was supplemented by stimulus checks have returned to a favorable labor market, where wages are rising.
But Gus Faucher, chief economist of PNC Financial Services Group, says the flow of Americans back into the labor market will slow, resulting in continued worker shortages that will curb job growth.
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“Most of the people who wanted to come back already have come back,” he says.
And most of the older Americans who retired early during the pandemic probably won’t return, Faucher says. He reckons the labor force participation rate will top out at 62.5% to 63%.
Jobs rebound, unemployment rate falls
The economy lost 22 million jobs in spring 2020, but now it’s just 1.2 million shy of its pre-COVID-19 payrolls, a gap that will probably close by summer. That means many of the restaurants, hotels, movie theaters and other businesses that laid off workers have rehired many of them, brought on new employees or found ways to manage with fewer staffers. The number of people on temporary layoff reached 18 million two years ago but fell to 853,000 in April, just above its pre-crisis level of 801,000.
“That’s the low-hanging fruit,” Bethune says of the laid-off workers who have been recalled.
And Ian Shepherdson, chief economist of Pantheon Macroeconomics, wrote in a note to clients: “Job growth was always likely to slow as the level of payrolls approached their pre-COVID peak."
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Paul Davidson is USA TODAY's senior economics correspondent. You can follow him on Twitter @PDavidsonusat and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.