May 2023 Labor Market and Economy Brief: The Federal Reserve and the Labor Market: Opposing Forces?

Listen to the brief

What Happens When Unemployment Increases, but so do Job Gains?

A friend recently reminded me of a scene in The Wire. It's the one where a couple of detectives are struggling to move a desk through a doorframe. After watching the men struggle and sweat for a few attempts, two more detectives join the effort. But even with two men on each side of the desk, it still won't budge through the doorframe. Finally, the four men step away from the desk to regroup. The original mover remarks, “At this rate, we're never going to get it in.”

The three men look at him. "In?"

They'd been trying to move the desk out.

It's not a perfect parallel to how things feel in the economy and labor market right now but it's close. The Federal Reserve is attempting to tame inflation by pushing higher interest rates and weakening the labor market, but the labor market is pushing back with steadyish unemployment, increased job openings, decreased layoffs, and sizzling job gains. In other words, the economy might be experiencing its No-est Landing yet.

A Closer Look at Labor Market Data

• Job Gains [Up]. In May, US employers added 339,000 jobs to their payrolls—almost double what economists predicted—and the prior two months' payrolls were revised upward by almost 100,000 jobs.
• Unemployment [Up]. Unemployment saw a jump from 3.4% in April to 3.7% in May. While still low by historical standards, the increase is exactly what the Federal Reserve is hoping to achieve with its interest rate hikes.
• Job Openings [Up]. According to April's Job Openings and Labor Turnover Survey (JOLTS), 10.1 million positions went unfilled in April, a 5% increase from March 2023 but a 16% decrease from the March 2022 record when 12 million positions went unfilled.
• Job Quits + Layoffs [Down]. The number of quits declined slightly to 3.8 million in April (from 3.85 million in March) a possible sign that workers aren't as confident about their job-switching prospects. Layoffs also decreased to 1.6 million in April (from 1.8 million in March) with notable decreases in construction (-113,000) and information (-33,000) a possible sign that employers, while concerned about the economy, are also concerned about the talent shortage.
• Wages [Up]. Average hourly earnings for all employees rose by 11 cents, or 0.3% in May 2023. On the year, wages were up 4.3%, in line with expectations. While the gains are still higher than pre-pandemic, they are slower than previous months.

Connecting the Interest Rate Dots: Later this month, the Federal Reserve will meet to either pause, pulse, or push interest rates. Prior to the strong labor market report, experts were betting on a pause, but this stronger report could complicate things. Even if they do opt for a pause in June, experts expect to see an increase later this summer.

Industry Trends in Engineering and Sciences

Economists saying, "Recession!"; are likely paying attention to the contraction the economy has experienced four of the last five quarters, while the ones saying, "Not a recession" are paying attention to the expansion in employment. Again, are we pushing the desk in, or are we pushing it out?

Employment in several industries experienced increases in May. While we'll explore a couple of them here, be sure to download the data report for a complete breakdown of employment trends.

Construction

Data from the St. Louis Federal Reserve reveals an explosion in construction spending as companies safeguard against EVER experiencing the supply chain woes they battled through during COVID. Other companies are exploring near and re-shoring options as global tensions with China rise.

Employment data supports the positive news in construction. Unemployment declined among construction workers and average hourly earnings for production and non-supervisory employees increased by 6% on the year, “Implying,” says Actalent analyst Eliza Hetrick, “that firms are paying more for talent that are harder to find.”

Which isn't necessarily what the Federal Reserve, in its attempts to curb inflation, wants to hear.

Executives will pay close attention to interest rate decisions in the coming months in an industry that's especially sensitive to higher interest rates. However, the full extent of the impact may not be felt given the $1.2 trillion in funding from the Infrastructure Investment and Jobs Act.

Transportation

Last month, we reported on Volkswagen's big announcement to shift production away from its home base in Europe and invest in US and Canadian opportunities instead. This month, Toyota announced plans to build its first US-made EV in a Georgetown, KY factory, which will require a partial rework the company's $461M investment originally announced in 2021. Not to be left out, Hyundai and LG Energy announced a $4.3B EV battery plant near Savannah, GA, which will begin construction later this year.

The automotive industry announced job gains of 6,800 in May, which is an increase of 6.6% over April. As discussed in the accompanying data report, recent investments in South Carolina have caused automakers and their suppliers to express concern about finding enough workers to complete their projects.

Efforts are underway on a local level to address the shortage, including the pairing of two South Carolina institutions  looking to create an affordable and clear pathway for students to earn a Bachelor of Science in Systems Engineering. The 2+2 program between The College of Charleston and Trident Technical College is designed to help meet the demand for more engineers in an affordable, time-efficient manner.