In a recent Vaco webcast, Mike Walden, President of Walden Economics Consulting, explored the state of the U.S. economy in Q2 of 2023. Using key metrics and data, Walden provided insights into the labor market, inflation and additional economic activity in the United States.
A look back at Q1
Before we examine the trends that emerged in Q2, let’s take a top line look at the state of the economy in the first quarter of 2023.
U.S. real GDP growth slightly underperformed forecasts in Q1, heightening (but not confirming) fears that a recession was imminent or underway.
Hiring in Q1 remained strong, job growth consistently outperformed projections and unemployment remained historically low throughout the quarter. Heading into Q2, however, the market began to show signs of a cooldown. Nonfarm payroll employment increased by 253,000 in April 2023, a 14% decrease when compared to average monthly job gains over the previous six months.
Despite the labor market’s resilience, other factors kept economic anxieties high. On February 1, the Federal Reserve hiked its benchmark interest rate by an additional quarter percentage point, marking the eighth such increase since March 2022. The rate hike was part of the Fed’s ongoing effort to combat historically high inflation, as year-over-year consumer prices jumped 9.1% in June 2022 (a 40-year high). In 2023, price increases cooled, even if only slightly. In January, the consumer price index rose by 6.4% compared to January 2022. By March, the 12-month increase had slowed to 5% but still far out-paced the Fed’s target rate of 2%. The Fed appeared poised to implement additional interest rate hikes throughout 2023.
Even with a robust job market and low unemployment, wage growth slowed over Q1. Inflation-adjusted wages for private sector workers increased just 0.1% for the 12-month period ending in March 2023.
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With the second half of 2023 upon us, Walden explored the top-level economic occurrences and trends of Q2.
Halfway through the year, the U.S. economy appeared to have mostly recovered from the effects of COVID-19, and economic performance was encouraging across multiple measurements.
Compared to 2019:
➚ Real GDP (adjusted for inflation) is 7% higher
➚ Payroll employment is 4% higher
➚ Labor force participation rate is 99% of pre-pandemic levels
THE JOB MARKET
The strength of the job market surprised experts yet again in Q2.
The U.S. job market remains robust in the face of historic inflation. In mid-2023, aggregate payroll, that is the estimates of average hourly earnings, average weekly hours and employment, was 4% higher than in 2019.
Additionally, unemployment was at a 50-year low. In April 2023, the national unemployment rate was 3.4%, the lowest since 1969. The rate had climbed to 3.7% in May, still among the lowest in decades. The number of unemployed persons per job opening hovered around 0.6 throughout Q2, meaning that for every 100 open jobs, there were just 60 unemployed people to fill them.
U.S. EMPLOYMENT AT-A-GLANCE
labor shortage update
Which industries continue to face challenges in hiring and retaining workers?
➚ 50 million U.S. workers quit their jobs in 2022, surpassing the previous record of 47.4 million set in 2021
➚ Hiring has outpaced quits since November 2020
➚ The spike in quits hit certain industries harder than others
These industries experienced a quit rate of 3%-5% in 2022:
- Leisure and hospitality (especially food service and accommodation) – 5.4%
- Retail – 3.9%
- Professional and business services – 3.4%
- Transportation, warehousing and utilities – 3.1%
The average quit rate for all industries from 2013 – 2019 was just over 2%.
Through the end of Q2, quits had crept up in retail, healthcare and social assistance, and ‘other services.’ Still, they decreased significantly in leisure and hospitality as well as professional and business services.
tech industry layoffs
Tech job cuts eased towards the end of Q2 but may pick up again with further interest rate hikes.
➚ In 2022, the tech sector added more than 175,000 net new workers, a 92% increase over pre-pandemic numbers
➚ Tech companies have cut over 150,000 jobs through the first half of 2023
In 2022, the tech sector added more than 175,000 net new workers, a staggering 92% increase over 2019. This was in addition to the estimated 213,000 tech jobs added the previous year. Towards the end of 2022, however, the bleak economic forecast put a heavy damper on the hiring boon.
In the first half of 2023, tech companies have announced over 150,000 job cuts, reflecting a sobering adjustment period after the sector’s aggressive pandemic expansion. Multiple factors contributed to the glut of tech jobs in 2021 and 2022, but increased remote work and reliance on technology during lockdown are among the most obvious. Amid higher interest rates, higher costs for products and services and lingering economic uncertainty, tech has been on a course correction since the third quarter of 2022 and has continued to moderate its hiring diet throughout the second quarter of 2023.
It’s important to note, however, that despite the mass layoffs, the tech sector’s total employment in 2023 far exceeds its pre-pandemic numbers.
One positive change to emerge from the pandemic is a slight narrowing in income inequality between the highest and lowest earners in the U.S.
Between 2019 and 2021, the bottom 50% of U.S. earners saw their net worth nearly double. From February 2020 to September 2022, the average income for the bottom half of earners increased by more than 10%, which outpaced income growth for all other groups except the top 1%.
A few factors have contributed to the narrowing of the income gap:
➚ Persistent labor shortage
➚ Slowing population growth
➚ Retirement among members of the Baby Boomer generation
There have yet to be any definitive measurements of the wealth gap in 2023, but the conversation continues to impact economic forecasts and perceptions.
Inflation cooled but remained high in Q2.
Headline Consumer Price Index (CPI) inflation, which reflects prices on all items, including food and energy, reached 9% in June 2022. Energy prices contributed heavily to the spike; ‘fuel oils and other fuels,’ as categorized by the Bureau of Labor Statistics, hit a 70.4% price increase in year-over-year comparisons.
12-month percentage changes for Consumer Price Index in Q2:
➚ April: 4.9%
➚ May: 4.0%
➚ June: 3.0%
Even with these improvements in Q2, inflation remains above the Federal Reserve’s target of 2%, meaning additional rate hikes may be on the way if the inflation rate stalls or begins to increase again. While the Fed voted unanimously to skip an interest rate hike in June, early reports from July showed the interest-rate setting committee is keen to raise rates twice more in 2023.
Recession fears are strong in the U.S., but the labor market has provided a consistent levee against the tide of economic panic in 2023.
Data from June provided the most compelling evidence that the U.S. job market might be cooling. June saw 209,000 jobs added, underperforming economists’ predictions and representing the smallest increase in U.S. payrolls in two and a half years.
The state of the economy, June 2023
➚ +209,000 jobs
➚ Wage growth: +0.5% month-over-month, +4.4% year-over-year
➚ Unemployment rate down to 0.1% to 3.6%
Even so, job growth is strong compared to historical numbers, and wages are rising. Wage growth accelerated more than expected in June, with average hourly earnings up nearly half a percentage point, which pushed the 12-month wage increase to 4.4%. The unemployment rate also edged down, from 3.7% to 3.6%.
These things together—continued job growth, low unemployment and rising wages—paint the picture of a persistently tight labor market. The increased cost of borrowing has put a slight damper on hiring, but not enough to curb the likelihood of further interest rate hikes in the back half of the year.
As the job market defies expectations month after month, recession predictions have been pushed further out on the calendar, with many economists saying a true recession won’t hit until 2024. Some question whether it will ever arrive; others argue a recession is already here.
Overall, Q2 has quelled rather than stoked immediate recession concerns, but experts aren’t fully exhaling yet. The U.S. economy is in uncharted waters, and there are no historical precedents to inform what will happen next. The second half of 2023 will go far in shaping the answer to the recession question, whether it’s a soft landing, a hard landing or no recession at all.
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