Key Themes and Takeaways
  • The US labor market remains strong. Employment growth averaged about 200,000 jobs per month in April through June while wage growth remained high.
  • Current economic indicators do not suggest an imminent recession or major slowdown. However, drawdowns of households’ excess savings are likely to contribute to slowing economic growth by the end of 2023.
  • Types of businesses impactful to workers compensation, including those in construction and manufacturing industries and many small businesses, are likely to be among those most affected by an economic slowdown or recession.

Economic Outlook

The US labor market remains strong. In the second quarter of 2023, employment growth held steady and wage growth remained high, especially for production and nonsupervisory workers. Hiring remained above and layoffs remained below pre-pandemic levels, and there are now around 2.5 million more open jobs than before the pandemic.

However, anxiety persists about the possibility of a looming recession despite these strong indicators. We address two key questions:

We then discuss the implications for workers compensation.

The labor market remains strong

Employment growth was stable in the second quarter

Employment increased by a monthly average of 200,000 private jobs in April through June of 2023. This represents a pause to the cooling employment growth throughout 2022 and into early 2023, which we highlighted last quarter. This employment growth is strongly positive and exceeded pre-pandemic average growth, which was closer to 150,000.

Private Education and Health Services contributed over one-third of all private employment growth in the second quarter, adding an average of more than 75,000 jobs per month. Most other growth was in service sectors as well. Office sectors were the next largest contributor, with Professional and Business Services and Financial Activities combining to contribute about 60,000 jobs per month. Leisure and Hospitality is growing more slowly than in prior quarters but still added about 20,000 jobs per month.

Employment stagnated in Transportation and Warehousing and in Information. Transportation and Warehousing employment has plateaued in 2023 after extraordinary growth in 2021 and 2022. The lack of growth in Information in part reflects recent layoffs at tech companies, which are a high-profile industry but not a major driver of overall employment change. The unemployment rate for Information workers is only 3%, suggesting that most of these laid off workers quickly found new jobs at other technology companies or in other sectors.

Wage growth is still high

Wage growth continues to be moderate but remains above the pre-pandemic rate. Overall average hourly earnings are now 4.4% higher than a year ago. Two important composition effects continue to affect wage data:

Job turnover data also indicates a tight labor market

We also see evidence for strong labor market conditions in job turnover data. In recent months, rates of new hires, separations, and job openings have held roughly steady. Job openings ticked up in April and back down in May, and the level of 8.7 million private job openings continues to be much higher than pre-pandemic. Hiring and separation rates are close to pre-pandemic rates, but a higher share of separations are worker quits rather than layoffs. Like employment and wage growth, these indicators show a strong labor market and not much evidence of cooling in the most recent quarter.

Are We Nearing a Downturn?

Despite a favorable labor market and other strong economic indicators such as robust consumer spending, some observers continue to insist that the United States is on the verge of a recession. As recently as April, forecaster surveys put a recession probability at 65% in the next 12 months.US Economy Headed for Downturn in Second Half of 2023, Forecasters Say, Reade Pickert and Kyungjin Yoo,, May 19, 2023. With labor market data remaining so strong, what is the reasoning that leads many to this conclusion? We raise two major questions. If the United States were to enter a recession, what would be the drivers? And do we see any evidence of these drivers so far?

If a slowdown or recession occurs, what is likely to drive it?

One proposed driver of a potential future recession is tightening credit conditions brought on by Federal Reserve interest hikes and, to some extent, through the bank failures that occurred this spring. When credit is more difficult or expensive to attain, businesses become more cautious in investment and hiring decisions, slowing economic growth.

A related driver is a potential reduction in consumer spending. This can arise directly from softening labor market conditions. As employment and wage growth slow, households have less income and tend to consume less. It can also occur before any slowdown in the labor market if households anticipate a negative shock to future income. Currently, there is another important reason consumer spending may slow down. Despite the economic disruptions, households built up substantial excess savings at the onset of the pandemic through mid-2021. People spent less during lockdowns and quarantine, and many households benefited from stimulus payments. But the personal savings rate has been low since mid-2021. If households are close to drawing down the balance of these excess savings, they may cut back their spending in the near future.

These issues would contribute to slowing economic growth or even a contraction—in other words, a recession. But do we see evidence to date to support those stories?

What kinds of businesses are affected by credit tightening?

In a recession, construction and manufacturing businesses often suffer earlier and larger employment effects than businesses in other sectors. The pandemic recession was an exception due to its impact on in-person services and demand for housing and home goods, but the Great Recession and most prior recessions follow this pattern. These are investment-heavy industries that can be very sensitive to lending conditions, both in terms of their own costs and in terms of customer demand. Households and businesses that are tightening budgets are less likely to demand new homes, buildings and big-ticket items like new cars or other durable goods.

More generally, tighter conditions affect small businesses across all industries. Many small businesses are reliant on loans and face higher costs or reduced access to borrowing when banks tighten credit standards.See, for example, Banks Raise Roadblocks to Small-Business Loans, Ruth Simon, The Wall Street Journal, June 1, 2023. This could lead to larger effects of credit restrictions on small businesses than larger businesses.

Are we seeing any negative effects in these businesses?

There is currently no clear evidence of a decline in economic activity or employment in the construction and manufacturing industries. Both sectors have shown moderate employment growth and are not showing warning signs of falling customer demand.

Residential construction demand is not as high as in 2022, but it is still strong. January to May 2023 averaged about 1.4 million new privately owned housing units at a seasonally adjusted annual rate, 9% less than in 2022 but still 10% more than the pre-pandemic monthly average. And there are potential signs of a rebound as the May average jumped to 1.56 million units, as high as it had been at any point in the last year.

Nonresidential construction spending is on the rise, with a 20% increase in the past 12 months. The growth in private nonresidential construction spending is mostly in manufacturing construction, which accounted for three quarters of the increase. Computer, electronic, and electrical manufacturing drives a large share of this increase, because of semiconductor and related manufacturing investments.Unpacking the Boom in U.S. Construction of Manufacturing Facilities, Eric Van Nostrand, Tara Sinclair, Samarth Gupta, US Department of the Treasury, June 27, 2023.

Manufacturing production is holding steady as well. As of May 2023, new manufacturing orders have remained fairly stable over the past year, with a current value of new orders approximately 25% higher in nominal terms than the level observed in 2019. Growth in manufacturing construction is a good sign as well, reflecting industry investment in future production.

Small business growth has slowed considerably, but this reflects the gradual cooling of employment growth since 2021 rather than a sudden recent drop due to a credit crunch. In fact, small business net growth has rebounded a bit in early 2023. The chart below shows a three-month moving average of difference between hires and separations by business size. In 2021, a huge amount of employment growth came from establishments with fewer than 50 employees. Net employment growth in these businesses slowed throughout 2022 but has stabilized in 2023 at almost 100,000 net jobs per month.

While medium and large establishments are now roughly equal contributors to overall employment growth, there is no evidence to date of a contraction in small business. These establishments continue to add more workers than they subtract each month, not cutting back as we might expect if credit concerns were front of mind.

What is the outlook for consumer spending?

Personal consumption expenditure accounts for about 68% of US Gross Domestic Product. A decline in consumer expenditure could result in an economic slowdown or even a recession. Over the last year, consumer expenditure has been very strong. But will this trend continue in the future?

The figure below plots real disposable personal income and real personal consumption expenditure since the beginning of the pandemic recession in February 2020, along with pre-pandemic trend lines for each measure. The terms “real income” and “real expenditure” mean these figures are adjusted for inflation.

At the onset of the pandemic, COVID-related financial support raised income significantly above its pre-pandemic trend. Spikes in the chart in April 2020 as well as January and March 2021 mostly reflect government stimulus payments. At the same time, spending was low because of shutdowns. Consumers accumulated real savings of about $1.89 trillion above trend from the start of the pandemic through August 2021.The Bureau of Economic Analysis (BEA) defines personal savings as: personal savings = disposable personal income – personal expenditure – other personal outlays where the other personal outlays variable includes personal interest payments and current transfer payments.

From around the middle of 2021 until May 2023, real expenditures returned roughly to the pre-pandemic trend, but real disposable income fell below trend. This means that consumers have been able to maintain their spending by digging into their real savings. Overall, real accumulated savings from August 2021 until May 2023 were about $1.64 trillion below trend, leaving consumers with about $250 billion remaining above-trend real savings from the beginning of the pandemic to the present. If current trends in real consumer spending and disposable income continue, we estimate that consumers will run out of “excess” real savings in September or October of 2023.

Does this mean that we should expect a decrease in consumer spending (and an associated slowdown or recession) to begin the fourth quarter of 2023? Not necessarily, for a few different reasons:

In other words, the decline in real savings shown above is likely to contribute to some cutting back and thus slowing economic growth late in the year and into 2024, but it does not indicate consumers will suddenly stop spending in the fourth quarter of 2023.We follow BEA convention by reporting real-valued data in 2012 dollars. Alternatively, translating to current dollars, accumulated real savings above trend through August 2021 were about $2.40 trillion and drawdowns below trend since have been about $2.09 trillion, leaving about $310 billion in above-trend savings from the start of the pandemic to the present. Our economic analysis is not affected by the choice of base.

What Does This Mean for Workers Compensation?

Strong employment and wage growth continue to drive premium growth for workers compensation. After cooling throughout 2022 and into early 2023, employment growth held steady in the second quarter of 2023, and wage growth remained high. Still, many observers predict a looming recession. A downturn would likely affect businesses that are particularly impactful to workers compensation, including the construction and manufacturing sectors, as well as small businesses across all economic sectors.

However, several key signs do not suggest that a recession or major slowdown is imminent. Construction employment and spending are currently strong for both residential and nonresidential subsectors. Manufacturing indicators are holding steady. These industries are usually the first to be affected by falling economic demand, and they have large effects on workers compensation premium and losses compared to their share of employment.

Small businesses played an outsized role in catch-up employment recovery. Small businesses are still growing, not showing signs of a contraction due to credit conditions. But they are comprising a smaller share of employment growth now than in the early phase of the pandemic recovery compared to larger businesses. It is possible this could lead to some mix change in payroll growth between self-insured and market-insured businesses, but any such effects are speculative.

One warning sign comes from household income and consumption. While growth in consumer spending has remained remarkably stable over the last couple of years, real-valued income has not kept up. Households are spending down surplus savings accumulated early in the pandemic, and consumption will likely dip below the trend as this surplus is likely to run out late in the year.

Slowing consumer spending is likely to contribute to slowing economic growth late in 2023 or in 2024. However, slowing growth is not the same as a recession. As we have discussed in this and prior issues of the QEB, employment growth and wage growth remain above their pre-pandemic averages. While a contraction is possible, we also see gradual moderation of employment and wage growth as a plausible scenario, without any employment or payroll declines. We will continue to monitor the health of the labor market and other important economic indicators in future issues of the QEB.