Labor Market Normalization: Finding a New Equilibrium

The labor market is coming back down to earth, but it's not falling off of a cliff.

Tomorrow is jobs day; it's a good time to stop and reflect on the state of the job market before we get the data for the last month of 2023.

The labor market has been slowly cooling off over the past year. It's natural for any type of decline to make people nervous, and the labor market is no exception. But it's still a strong labor market by historical standards. And most of the shifts in employment make sense when you look back at employment before the pandemic and put the post pandemic growth in context.

End of 2023 labor market growth was driven mainly by industries that had some catching up to do. They didn't have the blockbuster growth during the pandemic that other sectors experienced. Instead, they struggled to gain their footing and didn't close the gap until the very end of 2023.

The sectors that showed the most growth at the end of 2023:

• Healthcare: Healthcare reached its pre-pandemic level by the end of 2022, but it was growing before the pandemic hit and is expected to be a strong area of employment moving forward.
• Government: The government struggled to bring workers back after the pandemic layoffs. They tend to pay less and have long hiring processes, which made it harder to attract workers during an extremely tight labor market. Government jobs didn't reach pre-pandemic levels until October 2023.
• Leisure & Hospitality: Leisure & hospitality was hit hard during the pandemic. Being on the frontlines, hospitality workers took the brunt of much of the frustration and mental strife that the public was going through during the era of strict pandemic restrictions. Workers left the hospitality industry in droves. As pandemic restrictions eased and Americans embraced public life again, the sector struggled to find enough workers to keep up with demand. Leisure & hospitality also didn't reach pre-pandemic employment levels until October 2023.

Now, let's take a look at the other end of the labor market.

The sectors that saw employment decline at the end of 2023 were sectors that saw a substantial amount of growth during the pandemic. By mid 2021, these sectors had already surpassed pre-pandemic employment. And that strong level of growth continued until early to mid 2023 when post pandemic life really started to normalize.

The sectors that showed a decline at the end of 2023:

• Tech, Professional Services, & Financial Activities: The "white collar" job market has shown the most slack this past year. Part of that is due to the growth many of these sectors experienced during the pandemic period. When interest rates were low, funding was incredibly easy to get. Companies in sectors like tech and biotech/pharmaceuticals raised a lot of money that they quickly spent on expanding. But most grew more than they really needed to especially as behaviors started to return to normal. When the rates increased, funding dried up putting more pressure on the firms to right size their headcount. This is where we saw a lot of layoffs over the past year.
• Transportation & Warehousing: Transportation and warehousing didn't see the same level of decline that other industries experienced during the pandemic. Warehousing & storage never saw a decline in employment at all. The growth far outpaced the previous trendline it was on due to Americans ordering more goods while home with money to spare from the stimulus and spending less on services. In 2023, we saw this sector level off as spending habits, while still strong, are continuing to moderate. But employment is still far above pre-pandemic levels and while we don't know where it will settle, a lot of that growth should hold as consumers continue to spend and buy more online. Reshoring and nearshoring should also help fuel transportation & warehousing growth.

2023 started the process of normalization. 2024 should be closer to what our "new normal" will look like post pandemic. While I still have a lot of confidence in the labor market, here are some areas I'm going to be watching:

• Manufacturing employment: Manufacturing employment has been mostly flat looking over the past year. The manufacturing sector also experienced above trend growth during the pandemic, so some normalization is expected. However, there has been an enormous about of money spent on manufacturing construction especially centered around EVs, batteries, and semiconductors. I'll be watching as these plants start to come online in the next 1-2 years. That should give another employment boost to the manufacturing sector.
• Construction employment: Despite high interest rates, construction employment has continued to grow. There has been a boom in nonresidential construction driven mainly by the IRA and CHIPS Acts. We've also seen residential construction start to come back. There are potentially 3 rate cuts coming in 2024, which should help sustain the growth in construction.
• Temporary labor: I work in staffing. Temporary labor trends are important to me. I've talked about it before; I think part of the reason why temporary labor has had such a soft year without a recession is because of the tight labor market. We saw the same decline in 2019. Over the past year, there's been a stronger preference for permanent roles for both employers and employees. There are a lot of question marks around what temporary labor will look like in 2024. And, I think that trend will continue into the first half of 2024. The question is - will the labor market loosen enough to bring temporary labor back?

I never anticipated living through a global pandemic and I hope to never experience one again. As things settle down, there is still a lot of uncertainty. Yet, I am cautiously optimistic that the labor market will continue to grow in 2024, but at a much more manageable pace.

I am personally excited to see what 2024 holds for both the staffing and industrial sector!