Labor continues to block the expected recession


Economists have been talking about a ‘recession’ for more than a year, but the recession is not showing. Historically reliable recession indicators have been anticipating a recession all year (yield curve, leading indicators, etc.), but it is a “no show”. Chart 1 shows the labor market indicators that the NFIB has monitored for 49 years. Reported job openings and plans to hire have remained at record highs throughout the year, while all other indicators collapsed. This has left the NFIB Small Business Optimism Index much higher than it would have been with those two Index components at more typical levels.

As Chart 2 shows, excluding the two labor market components, the Index is about as low as it has been in 49 years (eight components vs all 10). Only in 1980 was the Index minus the labor components lower.

The strongest indicator, job vacancies, rarely fell below 10%, reaching almost 50% in recent months. Owners are always looking for employees to fill vacancies, but historically they have never had such a shortage of employees. In the most recent quarter, 60% said they were looking for employees and 43% reported no qualified applicants. A shortage of qualified applicants makes it difficult to fill open positions, even with historically high percentages planning to increase compensation (a net seasonally adjusted 21% last quarter, up from 27% a year earlier).

Chart 3 shows how successful companies have been recently in recruiting new employees: not very successful at all. The net percentage of firms that increased employment over the past few quarters is best described as “0”, negative in the most recent quarter. Staffing our businesses for growth has become a real challenge as population growth and labor force participation have declined. Complaints about the lack of qualified candidates can also indicate failures of our education system. Many young people have “graduated” without reaching the appropriate level of competence. An increased incidence of drug use has also contributed to “qualification” problems for many jobs.

In the absence of a staggering increase in worker productivity, the shortage of skilled workers is holding back economic growth. If small business owners could fill those open positions, output (GDP) and income would certainly increase. Virtually all industry classifications show that a significant number of companies are unable to hire the workers they need. It will take time to find solutions to labor supply problems, which will slow down our growth rate and employment.