Companies are hoarding labor because during the pandemic they laid off many workers, and firms have since had significant difficulties hiring workers back again.
With this experience in mind, employers are reluctant to let workers go. And with margins near all-time highs, there is room to hold on to workers. That is why jobless claims keep falling, and the unemployment rate remains at its lowest level in more than 50 years.
This labor hoarding effect can be seen in many sectors of the economy, even in the construction sector. There are some layoffs in tech, but even tech firms must be wondering what the right staffing levels are.
The bottom line for markets is that labor hoarding combined with high margins is a crucial reason this is likely to be a soft landing. In other words, we are in a production recession but not an employment recession, see chart below.
With inflation soon back near the Fed’s target, the Fed can over the coming months, again focus on consumer spending, capex spending, and earnings. Instead of focusing entirely on too high inflation.
In short, if the economy enters a mild recession later this year as the consensus expects, the Fed will have room to respond because, by that time, inflation will no longer be a problem.
Source: BLS, Conference Board, Haver Analytics, Apollo Chief Economist
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