MONEY

Is a 2023 recession coming? Job growth likely to slow sharply, companies brace for impact

When Eliud Diaz left his job at an online education company in August to care for his ill partner, he figured it would take a few weeks to find a new gig.

After all, the job market has sizzled this year and Diaz had an impressive variety of roles at the company, helping oversee accounting, requests for bids on contracts and the hiring of new employees, among other duties.

But after four months and about 100 applications, Diaz, who is 40 and lives in Lancaster, Pennsylvania, is still looking. He has interviewed with a handful of companies, but some of them later took down job postings, choosing to hold off in the uncertain economic climate. Diaz turned down others because they sharply cut the salary from previous levels.

Eliud Diaz

In January, he fears, hiring could slow substantially.

“That gives me some worry,” he says. “There is some frustration.”

The job market is expected to downshift significantly next year as the economy weakens amid high inflation and the Federal Reserve’s aggressive interest rate hikes to fight it. Economists expect average monthly job growth to slow to just 76,000 in 2023 from booming gains of 562,000 in 2021 and 392,000 this year as the nation continues to recover from the COVID-19 pandemic, according to a November survey by the National Association of Business Economics (NABE).

“It’s going to feel like it’s stalling out,” says Mark Zandi, chief economist of Moody’s Analytics, who also predicts average monthly increases of 76,000 in 2023 but a near flatlining of employment by midyear.

The unemployment rate is expected to rise to 4.5% by the end of 2023, according to the median forecast of NABE economists, up from today's 3.7%, which is just above a 50-year low.

In 2019, the last full year before the pandemic, the U.S. gained an average 164,000 jobs a month.

Though the outsize payroll gains of the past two years were predictable as the U.S. recouped all 22 million jobs wiped out by the health crisis – a milestone reached in August – the outlook for next year is far murkier.

U.S. employment is still about 2.8 million jobs short of where it would be if job gains had kept up with economic growth, says Morgan Stanley economist Julian Richers. Will some lingering momentum from catch-up hiring – along with a reluctance to let employees go after longstanding worker shortages – continue to prop up the labor market?

Or will Fed rate increases and soaring inflation finally take a bigger toll on hiring? 

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Hiring freezes, layoffs

For now, the job market remains sturdy but is gradually slowing. Employers added 263,000 jobs in November and an average 282,000 the previous three months, down from about 450,000 for most of this year

A growing number of companies are opting to leave jobs vacant when employees leave or announcing hiring freezes. Widespread layoffs so far have been limited to the handful of industries hammered by rising interest rates, such as technology, housing and finance, say Zandi and Jim McCoy, senior vice president of talent solutions for ManpowerGroup, a staffing firm.

“Businesses are very reluctant to lay off workers en masse,” Zandi says, citing the persistent worker shortages triggered by the pandemic. “They know that on the other side of this, their No. 1 problem is going to be finding workers."

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Zandi expects economic growth to slow from 1.8% this year to just 0.7% in 2023 as the U.S. narrowly dodges a recession. Households and businesses have historically low debt levels. And Americans still have $1.7 trillion in additional savings from government stimulus checks and COVID-19-related spending cutbacks, down from a peak of $2.6 trillion last year, he says.

As a result, he says, even though rising interest rates and inflation will lead consumers and businesses to pull back, they still have the financial wherewithal to spend, keeping the economy afloat and prompting companies to add workers.

Julia Pollak, chief economist of the online job site ZipRecruiter, is even more optimistic, projecting average monthly gains of about 150,000 next year, which is close to a historically normal pace. Many people are still resuming activities they halted during the pandemic, such as dining out, traveling and going to the theater, she says. And the industry serving them – leisure and hospitality – is still about 1 million jobs short of its pre-crisis level.

Such catch-up hiring should more than offset the meager job gains, or losses, in other sectors, she says.

Atlanta-based Azul Arc, which makes web and cellphone software for businesses, is adding five employees to its local staff of 11 this quarter and plans to bring on several more next year, says CEO Zahir Palanpur. Some customers, like a restaurant franchise, are seeking its services again after hunkering down during the pandemic.

CEO Zahir Palanpur and Marketing Coordinator Elena Castro at the Atlanta offices of Azul Arc

Noting his staff shrank by about 50% during the pandemic, Palanpur says he’s “building back our team.” And with big tech companies cutting workers and expanding the pool of candidates, he’s getting about 35 applications per job opening, up from eight to 10 a year ago. 

Richard Wu, 27, was laid off from his sales strategy and research job at a virtual events company in July. He posted about his experience on LinkedIn and added the site’s “open to work” banner to signal that he's receptive to job offers. Within two weeks, he received more than 24,000 page views and 100 messages from recruiters, hiring managers and others, including many job inquiries.

He applied for about 50 jobs, roughly half from the LinkedIn response, had 22 interviews and got three offers. He ultimately took a job at New York City-based Rokt, a top e-commerce tech company that replied to his LinkedIn posting and offered a huge raise.  

Richard Wu at his new employer, Rokt

“I didn’t expect to get the reaction that I did,” he says. “It’s definitely very exciting.”

Haley Damm, head of workforce planning for staffing firm Adecco says, “We have truly seen demand (for workers) continue to be strong.”  

Adds McCoy of Manpower, “There are still plenty of employers struggling to fill key roles.”

Is a 2023 recession coming?

Others are less sanguine about job prospects. Fifty-seven percent of the NABE economists see more than a 50% chance of recession next year. The vast majority of economists surveyed by Wolters Kluwer Blue Chip Economic Indicators believe the downturn will be mild. 

Gregory Daco, chief economist of EY-Parthenon, expects a recession to hit by the first half of 2023 as hiring slows and layoffs spread across industries, leading to 2.5 million net job losses for the year. He expects the economy to grow just 0.3% for the full year and unemployment to peak at 5.5%.

As fewer employers jostle for workers, both Zandi and Daco predict yearly wage growth will slow from 5% this year to a still-healthy 4% in 2023.

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It may be tough, however, to envision a healthy labor market and economy softening so quickly. Both consumer and business spending – the main engines of growth – rose solidly in October. 

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Small cracks, though, are forming in the economy's armor. Manufacturing activity contracted in November for the first time since 2020. 

With interest rates rising, Americans are buying fewer homes and cars. And to cope with high inflation, they’re taking on more debt, Daco says. Household credit card balances jumped 15% from a year earlier in the third quarter, the most in 20 years, according to the Federal Reserve Bank of New York.

That’s likely to dampen consumption next year. Intuit, the tax and accounting software giant, has a window into the finances of 100 million consumers and 10 million small businesses. Intuit CEO  Sasan Goodarzi told USA TODAY small business hiring remains strong, but middle-class consumers with credit scores of 600 to 660 have racked up $8,000 in additional debt on average since March, and their credit scores have dropped.

Though Americans are now reducing home and car purchases, “we believe over time they will pull back more broadly,” Goodarzi says, noting that interest rates on credit card purchases are also rising. “I think you’re seeing the tip of the iceberg.” He also expects unemployment to peak at about 5.5%.

Diaz, the Pennsylvania resident who is job-hunting, has been dipping into his savings to pay bills. He says he has downsized his cable TV package and stopped dining out.

The labor market is also cooling. The number of job openings fell to 10.3 million in October from a record 11.9 million earlier this year, and hires declined to 6 million, the lowest total since early 2021, Both, however, are still historically robust figures, and there were 1.7 job openings for each unemployed worker in October, evidence that employees still enjoy most of the leverage.

Beneath the surface, though, the balance of power in the labor market is starting to even out. Job candidates on LinkedIn, on average, are sending out 18% more applications than they did a year ago in a sign that it’s becoming tougher to land a position.

“More people are actively applying,” says Monica Lewis, LinkedIn’s senior director of product management.

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A help-wanted sign is displayed at a gas station in Mount Prospect, Ill.

Layoffs are also picking up. Technology firms beefed up hiring as their products were snapped up during the pandemic, but they're cutting workers now that more people are venturing from their homes. Companies such as Meta, Twitter, Amazon, DoorDash and Lyft have announced a total 143,000 job cuts this year. 

McCoy and Damm, the staffing executives, both say they expect hiring to throttle back moderately next year. Damm believes employers will focus more on retaining existing employees with competitive wages and flexible work setups than on expanding their staffs.

Elite Creative, which writes and edits books as well as blogs, white papers and other materials for corporations, has been planning to add several employees to its staff of 14 in 2023, says CEO Jennifer Rotner. Sales are up more than 20% this year. 

But she has been spooked by the drumbeat of layoff announcements by the tech industry, which includes many of her clients. She fears they'll scale back their writing projects. So instead she's going to bring on more contractors.

Jennifer Rotner, CEO of Elite Creative

“I am very, very concerned about hiring full-time people,” she says. “I don’t want to lay anyone off. ... I’ve got to keep my people safe.”