Why unemployment is likely to rise regardless of the recession

There are signs that the most popular job market of our generation is beginning to slow down.

NewsEditor
NewsEditor
02 July 2022 Saturday 06:25
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Why unemployment is likely to rise regardless of the recession

There are signs that the most popular job market of our generation is beginning to slow down. Economists predict that the historically low rate of unemployment will rise, despite technology companies cutting back on hiring and consumers becoming more cautious about spending.

Last week, the Federal Reserve made this clear when it raised interest rates by 0.75 percent. This move was intended to reduce inflation and loosen the labor market which is seen as being too favorable to workers.

A rise in unemployment does not necessarily indicate a recession. However, it is a sign that the market for jobs is changing. These are the most important indicators that there is change.

Federal Reserve Chairman Jerome Powell warned that there could be a sharp increase in unemployment as the Fed raises interest rates at its fastest rate in 25 years. Powell spoke at a Sintra central bankers forum on Tuesday. He stated that there was no guarantee the Fed would raise rates enough to slow inflation and not cause a recession.

"We believe that we can achieve this. He stated that this is our goal, but added, "It has gotten harder." The paths have become narrower."

The Fed announced last week that it would increase unemployment if it redoubled its efforts to curb inflation. The Fed previously predicted that unemployment would fall to 3.5% next year. However, it now anticipates that the rate will rise to 3.9% next and 4.1% in the years to come. To remove the previous prediction that "remain strong" in the labor market, the Fed updated its policy statement.

Brian Coulton, chief economist of the Fitch Group, stated that the Fitch Group now expects a significant increase in unemployment by 2024. He also noted that the statement dropped the reference to the "labor market to remain strong" in the statement.

Powell stressed that a 4.1% unemployment rate, according to the Fed, would still be very low by historical standards at a press conference following the hike.

He said that he didn't want to make people work less. However, he also stated that while we don't believe there is a shortage of workers and that more people need jobs, it is impossible to have the type of labor market you desire without price stability.

Powell stated that unemployment rates were below 4% only a few years ago. They had been there for about one year in the past 50. "A 4.1% unemployment rate, with inflation well on its path to 2% -- I believe that would be a success."

Already, the market for jobs has begun to slow down from its earlier frenetic pace. In February, 700,000 private-sector jobs were created, and in June, there were only 330,000 new ones. According to FactSet, economists believe June's hiring report will show about 250,000 new jobs.

According to Wells Fargo analysts, the three-month average of job creation has fallen to February 2021.

Tech is one sector that is reacting more strongly to the economic downturn. Technology-heavy Nasdaq Composite has lost one-third its value this year, while more speculation assets such as cryptocurrency have disappeared.

Layoffs followed. Tens of thousands of tech workers have been laid off in recent months. Established companies have also stopped hiring or withdrawn job offers. According to Layoffs.fyi, around 30,000 tech workers were laid off in May and June. This includes Coinbase, a fast-growing startup that cut 1,100 jobs earlier in the month. It also includes more established companies such as Netflix, Compass and Redfin.

Tech is among several industries that are particularly sensitive to rising interest rate and where hiring is expected slow down, said Joe Brusuelas (chief economist at RSM). In a blog post, Brusuelas stated that there has been "an observable slowing in hiring in rate-sensitive areas such as manufacturing, trade, transport and goods-producing sectors as well as finance."

The majority of U.S. jobs are held by small businesses. They are also reducing their hiring plans. According to the National Federation of Independent Businesses, while small businesses continue to have difficulty hiring qualified workers, the percentage of businesses that plan to increase their headcounts has fallen from its record highs in 2021.

Retail activity measures, another sector sensitive to slowing consumer spending, support the notion of a slowing labor force.

According to Dave Gilbertson (Vice President at UKG), the sector's workforce activity has been declining in March, April, and May before rebounding in June. The drop in workforce activity has been due to workers working less overtime. He said that if there is a slight drop in the workforce activity in the next months, it could indicate that there will be a gradual increase in unemployment.

He stated that if there is a big jump in the Fed's activity, whether it be positive or negative, then that could impact what they are likely to do.

Weaknesses in retail and tech have not yet led to more layoffs. Although initial applications for unemployment aid have increased since March, continued claims are still at an all-time low. This is a sign people who lose their jobs can find new ones quite easily.

According to Deutsche Bank research, which examined unemployment claims dating back to the 1960s, if claims continued to rise by 10%, that would signal a recession within the next two-months.

Researchers stated that although there isn't a trend in the area at the moment, it would not take too much to alter the picture.

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