Navigating a Possible Recession

Staffing Strategies for a Shorthanded World

Published on Apr 13, 2023

Updated on May 19, 2023

Written by Ron Hetrick

Navigating a Possible Recession

The classic economist joke: 

"Economists have correctly predicted nine out of the past five recessions."

There has been an obsession in calling for the next recession. When looking at the fundamentals, there really aren’t any overtly ominous signals. What these predictions are based on is the historical relationship between aggressive interest rate hikes by the Federal Reserve Bank and the slowing of the economy. However, this relationship may no longer be as clear as it once was, and Chairman Jerome Powell has acknowledged this several times over the past few months.

Why Labor Shortages Matter

Back in the late 2010s, it was becoming apparent that the retirement of baby boomers and a declining supply of young working adults was pushing many industries into difficult hiring times. Many companies weren’t even able to articulate the feeling as this was occurring so slowly. 

When pandemic responses kicked in, the boomer exodus already in motion accelerated so that labor force departures expected over the next several years happened all at once. Compared to February 2020, the number of people who say they are “not in the labor force” has jumped by five million, with well over three million of those individuals over the age of 55. This older population makes up the fastest growing labor segment in the US, in stark contrast to the shrinking 16-24 population and those entering the labor force.

Covid-19 relief payments that totaled roughly $2.5 trillion encouraged a national buying spree of historical proportions, but there weren’t enough workers to make or distribute the goods that consumers wanted. In two years, retail sales increased by the same amount they had over the prior eight years combined! Industries up and down the supply chain were trying to catch up and fill vacancies, but never could. 

Let’s look at durable goods manufacturing, a key buyer of contingent staffing. In 2022, job openings peaked at 630,000, but by the end of 2022, payroll jobs had only gone up by 160,000.  Meanwhile, new orders excluding aircraft have remained at record levels. Manufacturers are still dealing with backlogs, but they never could hire enough to address those backlogs. So they just got used to making less with less.

manufacturuing labor shortage

So…that recession prediction?

A recession by technical definition is “a sustained period of weak or negative growth in real GDP (output) that is accompanied by a significant rise in the unemployment rate.” This typically needs to last a minimum of two consecutive quarters. 

Here is where this gets complicated:

Recessions correct for over-accelerations. It is true that the goods producing sector significantly overheated over the past several years, but that came with an absence of spending on services. People weren't going out to eat, on vacation, or having elective surgeries, but they are now. Consumer spending is 70% of GDP and it is doing quite well. It will continue to do so given that unemployment is at a 50-year low. Nearly every American who wants a job has one, and they’re earning more than they did back in 2021.  

People have money, but what they don’t have are things to buy, like homes. Active home listings in the US are stuck at recent historical lows. Investment firms bought up to 30% of the available housing stock in some markets and wealthier consumers flush with cash bought as well. Home prices are 25-30% above their expected price, and home affordability has sunk to very low levels. Homes that were 15% of an average American’s monthly earnings two years ago are now 26% of those same earnings.  

Consumers also don’t have cars to buy. These inventories originally fell due to semiconductor shortages but are remaining low as automakers' have made conscious decisions to limit dealer inventories going forward. And with restaurants and hotels understaffed, even finding entertainment options to spend money on can be difficult. The demand is certainly there, but we still don’t have supply at an affordable price because of persistent hiring issues.

The classic indicators of a recession are currently not holding true, but these are confusing times as the Fed continues to try and weaken an economy where so many employers are still trying to hire workers. With so many factors at play, staffing companies need to monitor the broader picture to understand what current economic times suggest for them.

As a staffing company, what does this mean for me?

The bottlenecks in the supply chain have started to work themselves out now that demand has stopped its unsustainable upward growth curve. As a result, staffing companies may have noticed their orders for warehouse or materials workers dropping. This is a good sign as the demand for these workers was unrealistic, and this industry will settle into a more sustainable path going forward.  Many workers that were in warehousing are now starting to fill the plentiful number of job openings in services industries which will help ease labor costs going forward.

Manufacturers will experience mixed signals for a quarter or so as flowing supply chains make it easier to see what consumers are still ordering and what was in the backlog. In a couple months, these industries should settle into their historical trend of demand, and stability should return to what it was like in 2019, albeit with a much larger labor shortage issue.

For IT and other professional staffing, the same should happen. Expect lower demand early in the year, given the substantial decline in venture capital investments towards the end of 2022. Another contributor to lessening demand are skittish hiring managers responding to the recent high profile tech layoffs, which have surprisingly had very little impact on the unemployment rate for IT workers which only recently edged upward.

Tracking these occupational demand trends and market conditions is crucial for staffing companies.

Lightcast’s solutions are specifically tailored to the staffing industry—Staffing Analyst for corporate planning and SmartReq for near real-time supply, demand, and wage benchmarking and trending.

- Ron Hetrick, VP of Staffing Strategy and Senior Labor Economist at Lightcast

Access the data you need to make informed staffing decisions, recession or not.