January 24, 2023
It's a quiet week for the Federal Reserve amid the customary blackout — during which its officials avoid public speeches or interviews — before next week's policy meeting.
- But that won't stop us from looking at how little the central bank's rate hikes have affected employment (yet) in what are historically interest-sensitive sectors. That, and the latest indicators of business activity, below.
Today's newsletter, edited by Javier E. David, is 614 words, a 2.5-minute read.
1 big thing: The labor market's weird response to higher rates
The traditional story of how the Fed slows the economy to bring down inflation goes like this: It tightens money to curb demand in sectors of the economy sensitive to rates, causing them to contract.
- But this time around, something weird is happening. The sectors that traditionally contract when the Fed tightens policy have kept adding workers despite rapid rate hikes.
Why it matters: Labor's resilience in areas that are historically most sensitive to interest rate hikes — accompanied by declining inflationary pressure — suggests the Fed might be able to bring down inflation without widespread layoffs that accompany recessions.
State of play: A consistent feature of recessions is that employment in construction, and durable goods manufacturing, contracts in recessions.
- Those sectors, to a significant degree, are the business cycle. They expand in good times and contract in hard times, while other sectors like health care are more slow-and-steady.
- But there is no sign of dramatic contraction in those sectors, despite aggressive monetary tightening during 2022 that make buying a house, car, or other big-ticket items more expensive.
By the numbers: Construction employment rose 3.1% in 2022, rising in 11 of 12 months. Durable goods manufacturing employment rose 3.3%, rising in all 12 months.
- Neither sector appeared to lose momentum as the year progressed and rate hikes started to bite; instead, they continued to add jobs at a steady clip. The 28,000 construction positions added in December was the highest since May.
The strength in interest-sensitive sectors may reflect backlogs of demand for houses and cars from the supply-constrained period of 2021, argue Justin Bloesch and Mike Konczal of the Roosevelt Institute.
- "With supply still far behind demand, employers have no reason to lay off workers," they wrote recently.
- This may be good news, implying a path where the supply side of the economy continues to heal. That helps bring down inflation pressures without mass layoffs — at least in the sectors usually affected by tighter money.
- "[I]t's possible that all of the labor market cooling happens on the churn and wages side, and almost none on the layoffs side," they added.
Yes, but: The technology sector is one outlier, where big name companies continue to shed tens of thousands of workers.
- Layoffs have been disproportionately tech-related. Still, the information sector is just a sliver (roughly 2%) of overall employment.
- As it stands, there may be a tech recession as some companies adjust to more normal business conditions, after historic demand and hiring early in the pandemic. So far, it's contained and hasn't made a wave in the labor market data.
The bottom line: The labor market has cooled off, but without a significant uptick in layoffs — even in the sectors most impacted by higher rates.
2. Not-so-terrible picture from the latest surveys
A round of surveys out this morning also undermine the more pessimistic views of where the economy is heading.
Driving the news: The Philadelphia Fed's survey of non-manufacturing businesses in the mid-Atlantic rose in December, with 38% of respondents seeing increases in activity, versus 25% seeing declines.
- The new orders index was the strongest it has been since July.
- Meanwhile, the Richmond Fed's activity indexes — covering the states from South Carolina to Maryland — sent a mixed message, with its manufacturing activity survey ticking down this month but service industry activity improving.
Also out this morning, the S&P Flash PMI data rose to three-month highs for both business output and business activity.
- Those numbers, which both came in at 46.6, remain below 50, indicating contracting business — but slower contraction than in December.
The bottom line: Taken together, these surveys point to an economy that is experiencing some bumps, but is decidedly not in free fall.