Originally posted by CoStar News

Predictions for a modest recession with possible job losses in 2023 have, so far, come up short. The labor market has held up stronger than expected, despite rising interest rates, a frozen housing market and slowing manufacturing activity. But that may be, at long last, starting to change.

Firms added 236,000 positions in March, according to the Bureau of Labor Statistics, the smallest gain since December 2020 and a notable slowdown from the prior two months.

Adding to indications that the labor market may be loosening was March’s labor force participation rate, which moved higher for the fourth consecutive month as more than 1 million people entered or re-entered the labor market, with more than half of those finding jobs during the month.

The shortage of workers during the pandemic and beyond has been a missing piece in the return to normalcy. With many older workers choosing to retire early during the pandemic, challenges in returning to pre-pandemic labor force levels have been front and center. However, prime-aged workers, or those between the ages of 25 and 54, have more recently been driving the increase in labor force participation. That cohort has fully returned to its pre-pandemic rate, and should alleviate labor supply pressures that can lead to higher wages.

Indeed, average hourly earnings were marginally higher by 0.3% in March, but that represented a weaker annual gain of 4.2% from February’s annual gain and has been on a general downward trend since the middle of last year.

Plans for hiring are also rapidly changing. In a separate report from the Bureau of Labor Statistics, job openings fell to 9.9 million at the end of February from 10.6 million in the prior month, a clear indication that firms that had once been casting a wide net for candidates to fill prospective openings are rethinking their needs.

The biggest decline occurred in the professional and business services sector, where job openings fell by 278,000, a 13.3% decline. This large industry was at the forefront of hiring over the past few years, so seeing a retrenchment now is indicative of the slowdown in the labor market.

Other sectors have also begun to pull down their job listings as hiring needs slow, including those for hotels and restaurants, down 125,000; health care and social assistance, down 150,000; and transportation, warehousing and utilities, down 145,000. The retail trade sector removed 72,000 listings in February and lost 14,600 jobs in March, particularly in stores selling furniture, sports equipment, home improvement products and groceries — all much in demand during pandemic days.

The transition away from physical goods that were in high demand towards services is evident as the former lost jobs while the latter grew.

Finally, in more evidence of a slowing labor market, recent revisions to data on initial claims filed for unemployment benefits showed that job separations have grown faster over the past few months than earlier reported.

We have long wondered why the multiple, highly publicized announcements of layoffs have failed to appear in the data, often presuming that those laid off are easily finding replacement jobs. That may now be coming to an end. Claims made in the week that ended April 1 for benefits were 228,000, according to the Department of Labor. The week earlier, the number was 246,000, a revision that added 48,000 to earlier estimates.

What We’re Watching …

The Federal Reserve is keenly focused on the labor market as it has feared a fight for new hires would push up wages and prevent inflation from moderating. While prices of physical goods such as automobiles, furniture, home appliances and sports equipment — all in high demand during the pandemic — have moderated over the past year, and the lagging shelter component of price indices is expected to fall sharply in coming months, prices of services outside of housing remain stubbornly elevated. These sectors are labor-intensive, so wage gains are especially influential here.

Any emergent evidence of a slowing labor market will certainly be good news for the Fed and should buoy equity markets on the prospect of an end to rate hikes.