The job market and inflation are two interrelated economic indicators that have a significant impact on the overall health of an economy. The job market can have a meaningful impact on inflation. A shortage of labor, like the one we’ve seen over the last two years, typically leads to wage inflation as employers compete for a smaller pool of highly skilled workers. In contrast, the prevalence of remote work reduces the demand for office space, leading to lower rents and potentially lower inflation.
Inflation can also have a significant impact on the job market. If inflation is high, employers may be less likely to hire new workers as their costs increase. Alternatively, if inflation leads to higher interest rates as it has over the past year, it makes it more expensive for businesses to borrow money, potentially slowing down investment and hiring. In this blog post, we will explore the latest trends in the job market and inflation, and their impact on the economy and your business.
The Current Job Market
The US economy added 236,000 jobs in March, while the unemployment rate ticked down to 3.5%, according to the latest data release from the Bureau of Labor Statistics (BLS).
This follows a trend of slowing job gains after February's increase of 326,000 and January's increase of 472,000. It's also substantially lower than the 414,000 jobs that were added in March of 2022. For some perspective, keep in mind that pre-pandemic, a month when the economy added 200,000 jobs was reflective of a healthy labor market.
There is further evidence that deceleration in the macroeconomy is finally translating to a softening of labor market conditions. According to the most recent JOLTS report from the BLS, the number of job openings decreased to 9.9 million on the last business day of February. However, the number of hires changed little at 6.2 million, quits edged up to 4.0 million, while layoffs and discharges decreased to 1.5 million.
The basic implication is that the job market is in a new, more sustainable phase. However, will it be enough to prevent the Federal Reserve Board from hiking interest rates another 0.25 percentage points at their next meeting in May? Possibly, if you consider it in conjunction with the ongoing decline in inflation readings (see below) and recent banking sector woes.
The delta between job openings and the number of people actively looking for work was destined to shrink. However, even with the latest figures, there are still millions more openings than unemployed. The increase in quits and the decrease in layoffs also corroborate ongoing tightness in the labor market.
The key takeaways:
These trends will likely continue in the months to come. Your job as a leader and an effective business manager is to stay on top of the data and make decisions based on facts, not emotions. You also have to keep challenging yourself to evolve and continuously improve your company's talent strategy, while focusing on cash flow optimization, as attractive financing options will likely be unavailable for the next 12 months.
According to the Bureau of Labor Statistics, March’s Consumer Price Index (CPI) reading, which measures the way the US public is impacted by inflation, was 5.0%. This was the smallest 12-month increase since May 2021. The Producer Price Index (PPI) for final demand rose 2.7% percent for the 12 months ended in March, reflecting an even faster pullback in the way businesses feel pricing pressures.
The implications of these inflation data points are significant. They show that tightening lending conditions, stemming from March’s banking sector turbulence, had a potent impact on access to credit and an indirect yet tangible disinflationary impact on the US economy.
Lower inflation readings, combined with decelerating labor market dynamics (represented by fewer job openings, fewer jobs added every month, and a rise in the number of unemployed), will facilitate a more dovish posture by the FED and increase the likelihood that further interest rate hikes will not be necessary.
If the macro environment continues to deteriorate the way input from leading indicators suggests, we may even see a rate cut or two before the year is over.
The key takeaways:
What do these inflation readings mean to you as a business leader? A few things:
- It will be more challenging for you to raise prices to your customers this year, and you will get more pushback. In 2021 and 2022, price hikes across a spectrum of industries were the norm due to rising inflation and supply chain malaise. Now that inflationary pressure is falling and supply chains are slowly but steadily mending, customers will not be as accepting of price increases.
- A focus on profitability must be at the core of everything you do. While some of your input costs are declining (materials, logistics), others will keep rising (labor). You’re in business to make a profit, not just to grow your revenue, so in addition to your total bottom line, you’ll need to assess profitability at the customer and product line level.
- Based on your assessment, you may have to ditch certain “loser” products and walk away from some unprofitable customers. This is going to be difficult emotionally, as you want to hold on to everything you’ve worked hard for, especially when the macro landscape is weakening around you, but it must be done to preserve your resources for the products and customers that meet your margin requirements.