2 Million People Would Lose Their Jobs By Year-End, Fed Official Forecast Says: How Might This Be Avoided?

With unemployment at a 53-year historical low of 3.4%, the job market is showing little effects from monetary tightening measures by the Fed.

While inflation continued to wind down for the fourth consecutive month, the process to reach the 2% goal will be a slow one, as Fed Chair Jerome Powell and other officials have continuously stated.

Before the end of 2022, Federal Reserve board members and bank presidents posted their personal predictions for where they expected unemployment to be by the end of 2023, along with other key measures.

The officials were optimistic for the future impacts of their measures on inflation, but they also expected those measures to take a hard blow to the job market.

The unemployment rate was, on median, expected to be at 4.6% by the end of 2023. 

That meant 1,973,400 American residents would lose their jobs this year if workforce participation remained at the same levels.

Why Is Unemployment Rising This Year?

The general expectation is that the U.S. economy will fail to produce robust growth this year, said Dr. Mikhail I. Melnik, professor of economics at the Coles College of Business in Kennesaw State University.

Melnik said a 4.6% unemployment rate for the fourth quarter of 2023 was within his forecasts since the spring of 2022. In his eyes, "we are bordering a recession and will be lucky if we avoid it this year."

The main reason for this was that inflation is cutting into the discretionary spending of households.

January's retail sales report showed a 3% jump from the previous month, beating most economist estimates, yet Melnik warned, "It remains to be seen if that is a change in the trend or just a short-term jump."

In the fourth quarter of 2022, nearly 50% of GDP growth came from government spending, a sector that accounts for only about 20% of GDP, suggesting "that the private sector economy is soft."

Corporate layoffs, especially from big tech companies, further illustrated labor market softness, said Melnik. Although all the big tech layoffs of 2022 don't even amount to 0.1% of the total American workforce, the media amplification they produced weighs on the overall morale of the job market.

The price of oil remained under $80 a barrel in spite of "supply issues driven by OPEC's attempts to reduce output, sanctions on Russia's exports of oil, and Russia's talk of a possible retaliatory reduction in output."

For Melnik this suggested, "There might be some serious demand-side weaknesses" for oil.

The country's growing national and private debt can also have further negative impacts on long-term economic growth, he said.

Not Everything's Lost: How The Unemployment Rate Could Go Up Without Layoffs

One possible turn of events could have the unemployment rate reaching the forecasted 4.6% without the need for 2 million people to lose their jobs.

That's if labor force participation increases.

The unemployment rate is calculated by understanding how many people are unemployed within the entire workforce. If workforce participation grows by 2 million, all of those employed would keep their jobs but the unemployment rate would go up because new people would be looking for a job.

There are several reasons fueling this expectation, says Melnik, as inflation is an incentive for people to re-enter the labor market. Inflation increases the need for income while also raising nominal wages, which in turn serves as an incentive for people to get back to work or look for additional employment.

In addition, we might see a reduction in COVID-19-related income protection measures this year.

"If these are implemented, they would act as a further encouragement to reenter the labor market," said Melnik.

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