Economic Outlook for Q3 2024

Quarterly Economics Briefing–Q3 2024

By Stephen Cooper, Patrick Coate, and Yariv Fadlon

Posted Date: October 30, 2024


Key Themes and Takeaways

  • The labor market slowed meaningfully over the summer months before picking back up in September. Going forward, we expect more volatility in employment growth and a modest hiring pace, warranting a slightly more cautious outlook.
  • The broader economy remains in good shape. The labor market patterns we see now do not imply that a recession is coming soon, but they do reflect heightened sensitivity to any potential future shocks.
  • The Federal Reserve has shifted its policy stance to be less restrictive in order to support the labor market and address economic vulnerabilities. The recent strengthening of labor market data is unlikely to deter the Fed from reducing rates further.


The Economic Outlook and What Has Changed

Over the summer months of June, July, and August, economic data was mixed, once again raising questions around the durability of growth and the possibility of an impending recession. The July jobs report showed a material weakening in the pace of employment growth and a rise in the unemployment rate to a local peak of 4.3%. The weak jobs report was shortly followed by the largest negative annual benchmark revision since 2009, resulting in lower estimates for 2023 and early 2024 employment growth. While the August jobs report did show an improvement over July, employment growth was still well below its pace from earlier in the year.

Elsewhere in the economy, the news has been more favorable. Consumer spending remains solid, manufacturing activity is up from the January lows, and the Federal Reserve has shifted its policy stance towards lowering interest rates. A strong September employment situation report also eased fears as job growth accelerated again and positive revisions to previous months muted some of July and August’s apparent weakness. In this briefing, we discuss developments in the data across key segments of the economy, how those developments have impacted the economic outlook, and what it means for workers compensation.

Labor Market Developments and the Data Roller Coaster

The labor market is the most important aspect of the economy for workers compensation. It also happened to be the epicenter of mixed economic data over the past several months. A cursory glance at our past several Labor Market Insights reports1 shows two key trends that emerged in the data over the summer:

1 Labor Market Insights, NCCI, October 7, 2024.

  1. Employment growth had slowed
  2. The unemployment rate had slowly risen since its April 2023 low

The combination of these two trends once again called in to question the current state of the economy and brought forth new concerns of the worst-case economic outcome: a recession.

But the most recent Labor Market Insights report, which followed the release of the September employment situation, showed a partial reversal of both negative trends and a reacceleration of the labor market.

Is the coast clear or are there still reasons for concern? Let’s dive deeper.

Not only had employment growth materially slowed over the three summer months, but the release of the annual benchmark revisions2 in August showed that employment growth was overestimated by 818,000 workers for the period between April 2023 and March 2024. As of the May 2024 report, the prior 12 months had an estimated average monthly growth rate of about 220,000 jobs. After the benchmark revisions, estimated growth for that same period from June 2023 to May 2024 was lowered to 163,000 jobs per month. From June to August 2024, net employment growth slowed further to 116,000 jobs per month. In other words, last year’s employment growth wasn’t as strong as we had originally thought, and recently it has been slowing even more. Because slowing employment growth has preceded recessions in the past, one can easily see why questions about the labor market’s durability began to arise.

2 Economic Flash Report, NCCI, August 22, 2024.

image/svg+xml June 2023 May 2024 Sep 2024 0 50 100 150 200 250 300K Recent Employment Growth Also Shows Signs of a Cooling Jobs Market Monthly Change in Employment Source: US Bureau of Labor Statistics +220K 12-month average through May 2024 +163K average (after benchmark revisions in February 2025) +169K average for the latest four months +116K average for the three months before the revisions in the September jobs report

image/svg+xml Jun 1999 Mar 2001 +500K +300 +100 – 100 – 300 Mar 2006 Dec 2007 – 300 – 100 +100 +300 +500K Slowing Employment Growth Has Preceded Recessions Monthly Change in Employment Source: US Bureau of Labor Statistics +65K +275K +84K +152K Average monthly change Average monthly change

Does the Strength of the September Jobs Report Signal All Clear?

Short answer: No. Just as we would caution that one bad report does not constitute a new trend, the same logic applies to one strong report.

Long answer: It’s complicated. The strength of the September employment report provided some reassurance that some worst-case concerns around the state of the labor market were likely overblown, but more data will be needed before getting too excited about a possible re-acceleration in job growth.

In the above chart of monthly employment growth prior to the past two recessions, we can see that the lower average growth rates at the end of prior expansions (shown in orange) were defined by a mix of weaker and stronger months.

Both of those recessions were sparked by destabilizing economic shocks that quickly shifted the trend towards job losses. While the labor market dynamics we have seen recently do not exhibit recessionary characteristics, the trends toward slower employment growth and a higher unemployment rate leave the labor market less room to weather a destabilizing external shock than it had a year or 18 months ago.

If Employment Growth Is Slowing, What Does It Mean?

However, despite these examples of prior recessions, slowing employment growth by itself is not a recessionary phenomenon. There are several reasons why employment growth might slow in a healthy economy. After a few years of above-average hiring rates, companies may have hit their target levels of employment or even exceeded those levels and have slowed hiring instead of laying off workers. Indeed, we can see evidence for this in the Job Openings and Labor Turnover Survey (JOLTS). Over the last two and a half years of employment growth, the hires rate has slowly and steadily declined, but the layoffs and discharges rate has remained near record low levels even in the most recent months.

'21 '22 '23 '24 Aug 2024 0 1 2 3 4 5% Employers Have Slowed Hiring While Holding On to Workers Source: US Bureau of Labor Statistics The Hires rate has been in a steady, gradual decline ... but involuntary separations have remained stable 2015 – 2019 average Layoffs and Discharges rate reached a new historical low in 2021 Hires and Layoffs/Discharges as a Percentage of Employment

Another key reason for slowing employment growth is population dynamics. Researchers at the Federal Reserve Bank of San Francisco3 recently investigated the concept of “breakeven” employment growth, the rate of employment growth needed to prevent a change in the unemployment rate. The authors calculated the breakeven level of employment growth in the short run to be around 145,000 jobs per month, meaning that until recently, the labor market had experienced above-breakeven employment growth over the past several years. Over the long run, the authors estimated breakeven employment growth to be between 70,000 and 90,000 jobs per month.

3 “Breakeven Employment Growth,” Nicolas Petrosky-Nadeau and Stephanie A. Stewart, Federal Reserve Bank of San Francisco Economic Letter, July 8, 2024.

Thus, the summer 2024 average of 116,000 jobs added per month was indeed below the short-run estimate, but it was still above the long-run estimate. With the September report, near-term employment growth is now back above the short-run estimate, too. With labor force participation for prime-age workers already near historical highs, slowing employment growth is inevitable sooner or later simply due to demographics.

However, any complete story of the recent slowing employment growth must also account for the past year’s rise in the unemployment rate. From a low of 3.4% in April 2023 to 4.3% in July 2024, the increase is something that is difficult to ignore, even for the most optimistic economists. The Sahm Rule,4 named for economist Claudia Sahm’s automatic policy stabilizers theory, has been co-opted by the media as a recession indicator and was triggered in July. According to the rule, when the three-month average of the unemployment rate increases by 0.5% above its lowest point from the previous 12 months, the economy is already in a recession. The Sahm Rule has been triggered, but the economy doesn’t feel recessionary now. For more insight, we explore what elements drove the increase in unemployment.

4 Direct Stimulus Payments to Individuals, Claudia Sahm, Board of Governors of the Federal Reserve System, The Brookings Institution, May 16, 2019.

Since the April 2023 low in the unemployment rate, the number of unemployed people increased from about 5.7 million people to a high of about 7.2 million people in July 2024, before falling partway back to about 6.8 million in September. This does not, however, mean that 1.5 million people lost their jobs. Unemployment can rise in two main ways:

  1. Previously employed workers lose their jobs and start looking for new ones
  2. People who were previously out of the labor force start looking for jobs without finding them

May 2023 Sep 2024 +7.5M +5.0 +2.5 0 – 2.5 – 5.0 – 3.0M From Employment +4.0M From outside the Labor Force +0.1M Other Flows +1.1M Unemployed Persons – 500 – 250 0 +250 +500 +750K Unemployment Has Increased as More Workers Have Entered the Labor Force Source: US Bureau of Labor Statistics Labor Force Flows to Unemployment Monthly Flows Cumulative Flows

These two pathways have had opposite impacts on unemployment. From April 2023 through September 2024, net flows between employment and unemployment reduced unemployment by roughly 3 million people. Said another way, 3 million more unemployed workers found jobs than employed workers lost jobs. But during the same time, a net 4.0 million people entered unemployment from outside the labor force. The unemployment rate rose even during a period of above-breakeven employment growth not because more people started losing jobs, but rather because more people looking for jobs had difficulty finding them.

This is a mixed result—the labor market is still strong enough to draw in people who had previously not even been looking for work, but those entrants are having more trouble finding a suitable job than a year or two ago. As we saw in the JOLTS data, the story to date is about slower hiring, not more layoffs.

Policymakers’ Response to Data Developments

At the Fed’s Jackson Hole summit in late August, Chair Jerome Powell summarized many of the same labor market trends discussed in this paper before ending the section with a powerful quote: “We do not seek or welcome further cooling in labor market conditions.”5 Chair Powell and his team had seen enough to take action.

5 “Review and Outlook,” Federal Reserve Chair Jerome Powell, Reassessing the Effectiveness and Transmission of Monetary Policy, Jackson Hole, WY, August 23, 2024.

The Federal Reserve lowered interest rates at its September 18 meeting by 50 basis points, or one-half of 1%, beginning a shift in monetary policy towards a less restrictive stance. This action marked the first time interest rates had been lowered since 2020, and the half-point decrease (as opposed to just a quarter point decrease) showed how seriously the Federal Reserve took the change in data.

With the strength of the September report and revisions to previous data, was the cut of 50 basis point a mistake?6 Does the strong data prevent the Fed from further reducing interest rates?7 Not necessarily. Not only does one jobs report not define a new trend, but it is the real level of interest rates (adjusted for inflation) that impacts the economy rather than the nominal level. Because inflation fell from 3.5% in March 2024 to 2.4% today, real rates are higher now and policy is still more restrictive on the economy than it was in March, even after the Fed cut by 50 basis points in September.

6 “Larry Summers Says 50 Basis Point Rate Cut in September Was ‘A Mistake’,” Susanne Barton, Bloomberg, October 4, 2024.

7 “The September Jobs Report Dashed Hopes for Another Jumbo Rate Cut Next Month,” Filip De Mott, Business Insider, October 4, 2024.

'19 '20 '21 '22 '23 '24 0 +3 +6 +9% Consumer Price Index Sources: US Bureau of Labor Statistics; Board of Governors of the Federal Reserve System Fall in Inflation Has Increased Real Interest Rates Federal Funds Rate cut by 50 basis points in Sep 1.8% 2.4% Real Federal Funds Rate

Instead, the strength of the September jobs report gives the Fed some breathing room to continue to lower interest rates to support the labor market while keeping pressure on inflation. The net effect is that interest rates will still likely be heading lower to support the economy but not as quickly as they would have if labor market weakness had persisted.

Implications for Workers Compensation

These labor market developments have two important takeaways for the broader economy and for workers compensation.

First, a slowdown in hiring and a slow rise in unemployment are not in and of themselves signs of a recession. These are typical late-cycle behaviors as wage costs for businesses rise and high interest rates keep price growth in check, leading to fewer new hires. These trends do, however, raise sensitivity to a destabilizing external shock that could lead to a recession. Despite the strength of the most recent data, we are slightly more cautious on the labor market than we were earlier in the year and will await more data to assess where trends are heading.

The second takeaway is that slowing employment growth and wage growth moderating from its post-pandemic peak will likely lead to a continued slowdown in payroll growth. After several stellar years of payroll growth as the economy recovered from the pandemic, we could see payroll growth return to its pre-pandemic trend or even slip below it. This could impact premium growth in workers compensation in the near future.

The Consumer Still Holds the Keys to the Economy

As mentioned at the beginning of this paper, the labor market has been the epicenter of mixed economic data. Despite employment growth slowing over the summer, economic growth continues to be strong. In the second quarter, real GDP growth increased by an annualized 3% from the previous quarter, well above estimates of trend growth and well above the level of growth one would expect given the current interest-rate regime. Additionally, the Atlanta Fed’s GDPNow model8 is tracking Q3 2024 real GDP growth at 3.4% as of October 18.

8 Federal Reserve Bank of Atlanta, GDPNow, October 18, 2024.

How can the economy continue to grow strongly if the labor market is slowing?

So long as consumer spending, which makes up roughly 70% of the US economy, continues to grow, the economy may avoid a recession and keep the labor market intact. There have been questions for several years now as to the durability of the consumer’s checkbook, but so far the data has shown little sign of weakening.

After relying on the pandemic-era’s excess savings to bolster spending over the past several years, consumer spending has now found new support in real income growth. Thanks to continued wage growth and a fall in the rate of price inflation, consumers are once again seeing incomes grow faster than prices. Even as the rate of wage growth moderates from its pandemic-era peak, the fall in inflation has kept real wage growth steady at healthy levels, supporting continued consumer spending growth.

'19'20'21'22'23202413.514.014.515.015.516.016.5TSource:US Bureau of Economic AnalysisInflation-Adjusted Incomes Have Continued to RiseReal personal income excluding current transfer receipts, trillions of chained 2017 dollars

'19 '20 '21 '22 '23 2024 0 +3 +6 +9% Falling Inflation Moves Real Wage Growth Positive Average Hourly Earnings, YoY % Change Sources: US Bureau of Labor Statistics; Atlanta Fed's Wage Growth Tracker Inflation had exceeded wage growth, reducing the purchasing power of households Wage Growth Continuously Employed Workers Growth of the Consumer Price Index (CPI)

Should consumer spending continue to support economic growth at strong levels, the slowing in the labor market is unlikely to deteriorate into recessionary conditions. However, we will likely see employment growth near the breakeven employment growth trend discussed earlier rather than at the heightened growth rates of the last few years. While consumers are well supported to keep the economy growing, they have been known to be fickle in the past. The same susceptibility to destabilizing external shocks is ever present with consumers.

Conclusion

The labor market noticeably slowed over the summer months before recovering in September. A sustained slowing trend in the labor market comes with key implications for workers compensation. Slower hiring and moderating wage growth combine to slow overall payroll growth, potentially raising challenges to premium growth in workers compensation. While the rise in unemployment so far has been from increased supply, the labor market appears to be more susceptible to a destabilizing external shock that could flip the dynamic and lead to a loss of jobs. Recessionary conditions in the economy and labor market have well-documented impacts on workers compensation.9 We remain optimistic about the economy continuing to grow and avoiding a recession, but we have increased our level of caution given the recent data developments, particularly in the labor market.

9 “How Do Recessions Affect Workers Compensation?” Quarterly Economics Briefing, Patrick Coate, ncci.com, October 16, 2019.