The Fifth District Labor Market: Normalization or the Beginning of a Slowdown?
The Resilience, but Normalization, of the Labor Market
The U.S. labor market continues to surprise economists and forecasters with its resilience. In 2023, employers have added more than 300,000 jobs per month on average, and that's after adding around 500,000 jobs per month on average throughout 2021 and 2022. The unemployment rate is persistently low, and the job postings rate remains extremely high. There are, however, some signs of slowing. In addition to job postings falling from its peak, the pace of job and wage growth has slowed.
Reports from employers in the Fifth Federal Reserve District have been similarly strong, but with signs of slowing in hiring. At the very least, our surveys of manufacturers and service providers indicate cooling in what has been a red hot labor market.
Employment and Skills Availability
In both manufacturing and the service sector, the survey employment indices have been trending down since the middle of 2021 and are now within their pre-pandemic ranges. As with most of our survey indicators, we present these results as diffusion indexes, or the share of firms that reported increased employment in the past month minus the share that reported decreased employment.
There are three key features of the Fifth District employment indexes. First, each employment index is a measure of change from last month, so a low level of the index does not mean a low level of employment, but lower growth in employment from last month. Second, it represents an extensive margin, so while we might know whether firms are increasing or decreasing employment, we do not have information on the number of employees added or subtracted. Third, a decline in the index could be driven by more firms reporting no change in employment rather than solely more firms reporting job cuts. For example, in the second half of 2021, every month about 30 percent of firms (service sector and manufacturing combined) reported that employment had increased from last month, about 10 percent reported a decrease, and roughly 60 percent reported no change, resulting in an index value of around 20. In 2023, the share of firms increasing employment dropped to 15 percent, while the share that reported decreased employment rose to 15 percent, and the share that reported no change increased from 60 percent to 70 percent. This has resulted in the index value hovering around 0. In other words, recent declines in the employment index do not entirely indicate a sharply weakening labor market, but among some firms, slower monthly growth.
The other monthly measure of labor market activity in the surveys describes the extent to which firms can find workers who have the skills that they need. The chart below shows the share of firms that said it was easier to find these workers minus the share of firms that said it was harder to find them. Like the employment indexes, the indexes for availability of skills are back within their pre-pandemic ranges.
In this case, however, the decline in the share of firms reporting that it is harder to find the skills that they need is almost entirely accounted for by an increase in the share of firms reporting that it is easier.
What does this mean? Our surveys indicate that firms are moving from an environment of monthly employment growth where it was difficult to find workers with the necessary skills to an environment where employment is more flat and hiring is becoming easier.
Are All Industries Trending Equally?
We know that the pandemic and its aftermath has not treated all industries equally, nor has the ease of finding workers been uniform across industries, occupations, or regions. There are some subtle differences by industry in our sample. For example, in the past nine months, the increase in the share of professional services firms that reported that it is easier to find the workers that they need has been sharper and steadier than the increase among manufacturers. This is confirmed by what we hear anecdotally: Finding workers in manufacturing has only become marginally easier even as more professional services, retail, and warehousing firms report that it is easier to find workers. Even for those industries in which firms report loosening labor markets, there is little evidence of significantly growing slack; and there are still pockets of tightness at the industry level.
What About Occupations Within Firms?
Some of our outreach has indicated that firms are focusing their hiring or displacement on particular occupations within their firms. To better understand the occupational dynamics, we asked firms to report on how they plan to change headcount in various roles.
Overwhelmingly, firms in our sample planned to increase headcount of operational roles (e.g., production, front-line workers, data analysts, IT, etc.). There was one role — recruiting — in which more firms planned to decrease headcount than increase headcount. But even within that role, the share of firms planning to decrease headcount was not very different from the share in other occupational categories. In other words, neither aggregate nor industrial nor occupational breakdowns in our surveys indicate that we've seen, or should expect, sharp declines in employment.
What's Next for the Labor Market?
Firms have faced unprecedented uncertainty in the last few years: from a pandemic to an extraordinarily tight labor market to the highest inflation in four decades to quickly rising interest rates and financial sector stress. The Fifth District surveys certainly indicate some cooling in the labor market. But thus far, there is little indication that firms are seeing or expecting to see, a sharp labor market contraction.
