The US economy is predicted to enter a recession in 2023, with expectations of a shallow and brief downturn.
During this time, the unemployment rate is forecasted to increase to around 4.4 percent in early 2024, resulting in approximately 1 million job losses in the latter half of the year and Q1 2024. Although these numbers are relatively modest compared to previous recessions, the impact of layoffs will not be evenly distributed among industries, as some sectors will be more resilient than others.
The Job Loss Risk Index, displayed in the accompanying figure, ranks industries based on their vulnerability to job losses. A higher index score indicates a greater risk, with 10 representing the highest risk and 1 denoting the lowest. This score provides a relative ranking of each industry’s susceptibility to layoffs.
According to the index, the information services, transportation and warehousing, construction, and repair/personal/other services sectors face the highest risk of job losses. On the other hand, the government, private education services, health care and social assistance, and accommodation and food services industries have the lowest risk of job losses.
It’s important to note that while the index assesses the likelihood of job losses, it does not estimate the magnitude of layoffs within each industry.
Factors Affecting Job Loss Risk And Recession:
The risk of job losses in different industries is influenced by various key factors. These factors shed light on industry-specific aspects such as monetary policy, credit crunch, job function and education, pandemic recovery, labor demand trends, and age composition and experience.
Monetary Policy: Industries that are more sensitive to rising interest rates may need to lay off workers sooner. As the Federal Reserve increases rates, industries reliant on borrowing for growth are particularly affected, as servicing debt becomes more expensive.
Global Credit Crunch: Multiple Industries Hit Hard
The credit squeeze in the global economy, primarily led by the United States, is manifesting in various alarming ways. Initially, we witnessed significant job losses in the tech sector, where big tech companies resorted to “right-sizing” measures (a euphemism for cost-cutting). But now, the situation has now taken a darker turn, with seven large companies filing for Chapter 11 bankruptcy protection within a span of last 48 hours.
What makes this situation even more concerning is that these companies operate across diverse sectors, including media, real estate, healthcare, home security, manufacturing, and more. According to a report by Bloomberg, this represents the highest number of filings during a two-day period since 2008, particularly among companies with liabilities exceeding $50 million.
Amid concerns over the financial stability of banks, investors are diligently examining bank balance sheets in search of any indications of weakness. Simultaneously, government agencies such as the FDIC (Federal Deposit Insurance Corporation), the Fed (Federal Reserve), and the Federal Home Loan Banks are taking action to identify and address potential risks.
Job function and education: Firms often retain workers in professional or managerial roles who play crucial roles in decision-making and contribute to profitability. The index incorporates the share of management and professional workers, as well as the educational attainment of workers. Higher-educated workers are generally more secure in their jobs, while lower-educated workers in discretionary industries face a higher risk of job loss during recessions.
Pandemic recovery: Industries that haven’t fully rebounded from pandemic-related job losses are likely to have understaffed positions and, therefore, may be less inclined to lay off workers. Conversely, industries that are overstaffed during the pandemic may face a higher risk of job loss.
Labor demand gauge: Industries that experienced employment growth or decline before the pandemic due to changing consumer demand are likely to continue following those trends. For example, brick-and-mortar retail trade employment grew modestly, while transportation and warehousing saw substantial growth due to the shift toward online shopping.
Age composition and experience: Younger workers, typically aged 16 to 24, tend to be more vulnerable during recessions due to their limited on-the-job experience and employment in high-turnover positions. Historical data shows that this age group faces higher unemployment rates during economic downturns.
High-Risk Job Losses Loom for Information Services Sector
The information services sector is facing a significant risk of job losses. During the pandemic, the industry experienced substantial employment growth, driven by increased demand for technology, innovation, and digital transformation. As lockdowns ease and consumer behavior shifts, the demand for technology is waning. Currently, the industry is witnessing declining job openings, higher layoff rates, and fewer quits, indicating that labor shortages are less of a concern. Wage growth has been very modest this year for the industry.
But the sector’s discretionary nature and high debt levels make it vulnerable to interest rate hikes. Additionally, the valuation of tech companies, which dominate the information services sector, relies heavily on future profit expectations. With rising interest rates, borrowing costs and debt servicing become more challenging, often leading to reduced spending, hiring freezes, and ultimately, layoffs.
Transportation & warehousing: This industry experienced significant growth during the pandemic, adding 15.8 percent more jobs. However, job openings have cooled, wage growth has been modest, and labor demand is slowing, primarily driven by e-commerce. With an anticipated decline in consumer spending, the industry’s earnings and need for workers are expected to dampen, putting jobs at risk.
Construction: Sensitivity to interest rate hikes and a decline in new housing starts contribute to the high risk of job losses in this industry. Quits rates have fallen rapidly, indicating cooling labor demand. As demand for construction workers decreases, the projected recession poses a significant threat to employment in the construction sector.
Repair, personal & other services: This industry faces high-risk job losses, driven by declining consumer demand during downturns. Relatively lower job openings, quits rates, and moderate wage growth suggest a lesser impact from labor shortages. With a younger and less educated workforce and a lower share of management and professional workers, this industry is more susceptible to job losses during economic downturns.
Manufacturing: Reduced consumer spending during a downturn puts manufacturing at a high risk of job losses. The industry had low labor demand before the pandemic, with automation reducing reliance on human labor. Although it recovered lost jobs during the strong goods demand in 2020 and 2021, labor shortages have eased, and the industry now faces the challenge of slowing goods demand.
Wholesale trade: With sluggish employment growth even before the pandemic, this industry is at high risk of job losses. Increasing layoff rates, moderated wage growth, and the easing of interest rate sensitivity contribute to the industry’s vulnerability.