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The Resilience of the US Labor Market Amidst Economic Downturn

Harvest Global Markets :

A decline in the US economy is driven by an escalating strain from tight financial conditions as household spending is flattening, business investments are showing cyclical declines, and the housing construction sector is continuing on its weak trajectory but what has kept the US economy strong in times of adversity is the resilience of the strong labor market despite consistent supply disruptions.

With consumer prices soaring high and tightening monetary policy by the FED, the wage expectation has increased its inflation sensitivity in the post-covid recovery era with several stimulus packages being provided to bring economic growth to the pre-pandemic levels. Even with economic downturns and lowered demands for many goods and services, employers are willing to retain their most valuable human resources in anticipation that they might contribute positively once the economy accelerates, demand increases, and operational capacities are functional to their maximum levels.

The strong labor market that is being observed right now is not only the pandemic’s short-term instability; rather, it is the continuation of a long-term trend being observed in the younger generations in the US economy.  The Great Resignation, a term coined in May 2021, describes the record number of people leaving their jobs since the beginning of the pandemic. After an extended period of working from home with no commute, many people have decided their work-life balance has become more important to them. This socioeconomic phenomenon has made it difficult for employers to retain lucrative skillful employees.

Labor shortages are most acute in some of the industries hardest hit by the pandemic. Payrolls in the U.S. leisure and hospitality industry are more than 1 million below where they were prior to the COVID-19 shock. Restaurant staffing is also lower as well.

Although Fed officials seem prepared to start lowering the rate of interest rate increases, if inflation persists, all bets are off. This is especially true if potentially confident workers demand greater pay raise, which would eventually drive up prices. Rate rises as a result of the Fed and other central banks may cause severe economic downturns in those countries, and businesses would likely be forced to make significant layoffs as their revenues decline.

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