When interest rates rise rapidly, the U.S. has usually experienced rising layoffs and unemployment if not outright recession.Not this time.
Layoffs remain near record lows and the unemployment rate sits at just 3.7%, a level last matched in the late 1960s. The U.S. is also still adding jobs, though at a slower rate.
The economy, in turn, has kept expanding at a pace that analysts say is above its normal speed limit. A recession seems no where in sight.
Nor is there any sign the labor market is about to suffer a deep freeze like the current weather around much of the country.
Take jobless claims, a proxy for layoffs. They fell last week to a 16-month low of 187,000 and clung close to the lowest level in more than 50 years.
Jobless claims are actually even lower now than they were when the Federal Reserve fired off a staccato of interest-rate increases starting in March 2022.
The Fed hiked rates rapidly over a 16-month period to try to slow the economy and cut off the sources of high inflation bedeviling American households and businesses.
The central bank raised its benchmark short-term rate from near zero to a top end of 5.5%, ending a pandemic-enhanced era of easy money. Other interest rates also rose, especially for mortgages, auto loans and credit cards.
The higher cost of borrowing has helped to slow inflation, all right. The rate of inflation is going up just 3% now, compared to a 40-year peak of 9.1% a year and a half ago.
The hard-won gains on inflation have not come at the cost of massive job losses, as with past episodes of Fed rate-raising. Far from it.
Employment growth has slowed, to be sure. Hiring has dried up in U.S. manufacturing, one of the sectors hurt most by rising interest rates.
Yet some other major industries are still adding jobs. Businesses in leisure and hospitality — think hotels and restaurants — created nearly a half-million jobs in 2023.
What higher borrowing costs have done, however, is reduce the demand for labor. And that’s best seen through job openings.
The number of job listings nationwide fell in November to a 32-month low of 8.79 million. Openings had reached a record 12 million when the Fed first began to raise rates in March of 2022.
“This suggests that businesses are not laying off workers but are cutting back on hiring,” noted longtime economist Stuart Hoffman, an advisor at PNC Financial Services.
That’s exactly what senior Fed officials had hoped to see.
Once they began to raise rates, Fed Chairman Jerome Powell and his colleagues said they wanted the number of job openings per unemployed worker to return to pre-pandemic levels. They put a lot of emphasis on that.
There were about 1.2 job listings per unemployed worker before the onset of the pandemic in early 2020. The ratio soared to a record 2.0 just as inflation was near a peak, underscoring the leverage employees suddenly had over employers.
They used their newfound power to demand higher pay, adding another potential source of inflation to the Fed’s list of worries.
Higher borrowing costs have worked to curb the appetite for labor. The ratio of job listings to unemployed has since subsided to a more manageable 1.4, and not surprisingly, wage growth has moderated as jobs become harder to obtain.
The Fed, as it turned out, had adopted a new theory of unemployment in the post-pandemic era. A tight labor market and lack of workers spawned by the crisis would discourage companies from firing people, the thinking went.
Instead, businesses would “hoard” current employees and simply reduce hiring.
“It just seemed counterintuitive to me that with that many job openings and so few people looking for work that the first thing a firm would do when labor demand softened would be to lay off workers,” Fed Gov. Chris Waller said in a speech this week.
“My economic instinct was that this time things would be different and that vacancies would absorb the decline in labor demand, while employment and unemployment changed relatively little.”
So far the new theory has worked out. Still, not every economist is convinced the layoffs will stay low.
Some contend higher borrowing costs are bound to nudge the U.S. toward a period of extremely weak growth or even a mild recession. Yet the same view, it should be noted, was also widespread last year and yet the economy actually got stronger.
Fed officials and scores of other economists, on the other hand, are increasingly convinced annual inflation can be restored to pre-pandemic levels of 2% of less without a deflating economy.
The resilience of a cooling but still-sturdy labor market is the chief reason why.
“There seems to be no signs of a collapse in the labor market and that is good news for those that believe the economy will continue to expand and that a recession will be averted for this year as well,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance in Charlotte, N.C.
Online home goods retailer Wayfair announced Friday that it is laying off approximately 1,650 employees, representing about 13% of its global workforce, in a move that is expected to save the company more than $280 million annually.
"The changes announced today reflect a return to our core principles on resource allocation, such as getting fit on spans and layers as well as focusing on our highest priorities," Wayfair CEO and co-founder Niraj Shah said in the news release.
"As a result, we're reducing team sizes across the organization, as well as reducing seniority in certain roles that we plan to rebuild with modified leveling over the course of this year," Shah said.
In a note to his employees, Shah said the company "went overboard in hiring during a strong economic period and veered away from our core principles, and while we have come quite far back to them, we are not quite there." He also went on to say that COVID also contributed to the increase in hiring, "a time where the company's annualized sales grew from $9 billion to $18 billion "almost overnight," according to Shah.
'Work longer hours': Wayfair CEO told employees last month
The news of the layoffs come about a month after Shah dished out some tough love in a year-end memo to his employees. In the memo, Shah said employees should be prepared to work longer hours and not be afraid to let work impinge on their personal lives.
"Working long hours, being responsive, blending work and life, is not anything to shy away from," Shah said in the email. "There is not a lot of history of laziness being rewarded with success. Hard work is an essential ingredient in any recipe for success. I embrace this, and the most successful people I know do as well."
He sought to enlighten workers on the accuracy of "Nirajisms," sayings about workplace culture attributed to the CEO that are either "not true, are old and no longer applicable, or are taken out of context," Shah said.
"The one I would reference here that I heard was 'Niraj said that he does not think that we should work late.' I would suggest that this is laughably false," the CEO wrote. "Hard work is essential for success, and a key part of getting things done. Everyone deserves to have a great personal life – everyone manages that in their own way – ambitious people find ways to blend and balance the two."
Shah kicked off the note by saying Wayfair, which cut 5% of its workforce in 2022, had turned a corner. In November 2023, the company reported sales of $2.9 billion in the quarter ending Sept. 30, up 3.7% over the year before. Its third-quarter net loss of $163 million is 42% lower than the $283 million net loss in the same quarter in 2022.
The note closed with: "Together we can win much faster than we are winning now if we all row in this direction together. Let's be aggressive, pragmatic, frugal, agile, customer oriented, and smart. Thanks for being on the team!"
Layoffs also impacting other industries
In addition to Wayfair, other large companies across multiple sectors have recently announced layoffs.
Department store chain Macy's recently announced that it is laying off over 2,000 employees and closing five stores, according to the Wall Street Journal.
Google has announced two rounds of layoffs in the last two weeks, eliminating several hundred roles in its advertising sales, hardware and central engineering teams. The layoffs also impacted employees who work on Google Assistant, the company's voice-activated software product.
Amazon's livestreaming platform, Twitch, also announced earlier this month it was cutting 35% of its workforce. Amazon is also cutting jobs in its Prime Video and Amazon MGM Studios divisions, while other tech companies, like Discord and Duolingo, have also announced layoffs to start the year.
General Motors announced in December it was laying off 1,314 employees at two factories in Michigan in connection to ending production of vehicles.
NBC News also recently announced that it was laying off several dozen employees.
