Don't Expect Mass Layoffs Anytime Soon

There are few signs that Americans should expect massive job losses any time soon.

Recent layoffs from the tech sector have created a sense that the jobs market may have begun to soften under the weight of high interest rates and elevated inflation. But there is evidence that Americans are learning to navigate their way around high prices and are still spending at a healthy clip, powering the economy. When job losses have emerged, businesses have absorbed them pretty quickly, economists say.

"Nothing in the data is cause for alarm, meaning it's not that we're thinking all of a sudden we'll see a spike in unemployment or a huge wave of layoffs that can't be absorbed at this point," Yelena Maleyev, a senior economist at consulting firm KPMG, told Newsweek. "Simply because of how much resilience we've seen in the consumer and how much they continue to spend and sit on excess savings as well."

Recent job numbers show that companies are hiring or keeping people employed with little evidence of cuts in their personnel. In September, employers added nearly 340,000 jobs, beating expectations. For the week ending October 14, fewer people applied for jobless benefits, suggesting that people are staying at their jobs and are not getting fired or quitting.

The headlines of cuts at tech firms and banks involve a sliver of the job market and some economists say it's worth being cautious not to read too much into what they mean for the overall labor market.

"These are typically high-educated individuals who don't have much trouble finding new jobs," Mahir Rasheed, a senior economist at insurance firm Swiss Re, told Newsweek. "You'll see that the latest initial jobless claims numbers remain near historic lows, signaling that even if layoffs have picked up recently in pockets, they are not yet having a significant impact on the broader labor market or economy."

Nevertheless, the labor market is cooling from its historic levels immediately following the COVID pandemic, when a re-opened economy had businesses hiring to serve pent-up demand from Americans who had been stuck at home.

Layoffs have gone up but much of the cooling of the labor market is from businesses slowing down hiring, said Guy Berger, a former principal economist at LinkedIn.

"Most of the cooling in the labor market that has happened has been driven not by layoffs going up, but by hiring coming down," he said in an interview. "People are starting far fewer jobs. They're staying in their jobs longer, they're quitting less."

The reports of layoffs have been concentrated in specific sectors and it was premature to suggest that they are indicative of a wider jobs crisis in the economy, he said.

"There been a few here and there, but it's certainly not a widespread phenomenon the way it would be during a genuine downturn," Berger told Newsweek.

"This labor market still looks like a normal strong one, not an abnormally strong one that was two years ago, but also definitely not a bad one like we would have thought considering a typical recession," he added.

The Fed effect

Since March 2022, the Federal Reserve has aggressively hiked rates to slow down an economy that was grappling with inflation hitting 40-year highs. The central bank held back raising rates at their last meeting in September, currently at a two-decade-high level of 5.25 to 5.5 percent. But Fed chair Jerome Powell suggested last week that inflation was still too high and that policymakers were inclined to keep rates higher for longer to bring down rising prices to its target of 2 percent.

Elevated interest rates have pushed up the cost of borrowing and small businesses are noticing their price of capital jump substantially, according to Torsten Sløk, chief economist at private equity firm Apollo Global Management.

Small businesses are paying 10 percent interest on short-term loans, he said in a note, citing data from the National Federation of Independent Business.

"The outcome is lower [capital expenditures] spending and lower hiring," Sløk noted.

Powell suggested that central bank policymakers would retain higher rates until inflation was sufficiently down to target. This could mean a slowdown in hiring.

"The record suggests that a sustainable return to our 2 percent inflation goal is likely to require a period of below-trend growth and some further softening in labor market conditions," he said.

If monetary policy continues to stay restrictive and the Fed takes more time from reversing course, there is a risk that layoffs may increase and hiring could go down to throw the labor market in reverse, Berger said.

"It hasn't happened yet, and I definitely do not think that it is inevitable that we're going to see much more, clearly, in the labor market," he said.

The Fed, in its projections from its September meeting, suggested that the unemployment rate, currently at 3.8 percent, could rise to 4.1 percent next year and hover at around that level through 2026.

Maleyev told Newsweek that the expectation is for the unemployment rate not to go up substantially this year but there could be a spike next year as the Fed keeps a tight monetary environment.

"But we don't have payroll growth turning negative," Maleyev said. "We still see payrolls growing, albeit at a much slower clip than they have been over the last few months."

Swiss Re's Rasheed said that the labor market was cooling compared to the past couple of years as wage growth has slowed and job quitters are back to pre-COVID rates.

"Despite a blowout jobs number in September, the breadth of job growth is about in line with its average from the [post-global financial crisis] decade in the 2010s," he told Newsweek.

"This is encouraging (so far) as it indicates a gradual buildup of slack consistent with a soft landing," he added, referring to a scenario where despite record-high rates from the Fed, inflation moderates without too much damage to the economy and the labor market.

"However, the labor market is famously a lagging indicator, and we expect a broader deterioration in employment to take hold at the turn of the year and over the span of 2024 as interest rates remain in restrictive territory," Rasheed said.

Other indicators, such as consumer spending, particularly in the services sector, could keep people hired, Maleyev said, and there was still momentum there.

"That's where all the spending has been really booming," she told Newsweek. "So the labor market is still looking healthy."

There are risks, especially with rates as high as they have been, Maleyev cautioned.

"But at this time we don't have an expectation in our forecast for mass layoffs or a huge uptick in unemployment," she said.