Every Macro Layoffs Discussion Should Start With This Key Metric

Stocks made new record highs, with the S&P 500 reaching a closing high of 5,029.73 on Thursday and an intraday high of 5,038.70 on Friday. For the week, the S&P shed 0.4%. The index is now up 4.9% year to date and up 39.9% from its October 12, 2022 closing low of 3,577.03.

The strength of the stock market seems in conflict with the plethora of news headlines on companies announcing layoffs. Here are a few from just the past week:

Nike to Cut Over 1,600 Jobs - The Wall Street Journal

Paramount Lays Off Hundreds of Workers - The New York Times

Cisco to lay off thousands of employees - CNN

Cleveland-Cliffs closing West Virginia tin plant, 900 to be laid off - Fox News

There’s no question that this is unfortunate. It can be particularly distressing to the individuals who are directly affected.

But if you’re thinking about what these headlines mean for the economy as a whole, you need a lot more context before you prematurely jump to conclusions.

For starters, it’s important to understand what’s typical for layoffs across the economy.

According to the most recent monthly Job Openings & Labor Turnover Survey from the BLS, employers laid off 1.6 million people in December.

That’s a large number. But as the chart below shows, monthly layoffs during much of the current economic recovery have bounced around between 1.3 million and 1.8 million. During the prepandemic economic expansion, this figure trended between 1.6 million and 2 million.

It’s not unusual for employers to lay off over a million workers per month during economic booms. FRED

There’s a lot to be said about all this. Here are a few points:

• To get to 1.6 million layoffs, a lot of companies have to make a lot of layoffs. For example, 1,600 companies announcing 1,000 layoffs gets you to 1.6 million. That is to say, the layoffs reported in the news may just reflect an ongoing phenomenon in the economy.

• The 1.6 million layoffs represent just 1.0% of total employment. This layoff rate has ranged from 0.9% and 1.2% for most of the current recovery. During the prepandemic economic expansion, this figure trended between 1.1% and 1.4%.

• Many people who get laid off return to work pretty quickly. This is confirmed by the fact that employers hired 5.9 million people in December (This includes people who were hired after quitting jobs). Furthermore, according to BLS data, the U.S. economy has experienced net job creation for 37 consecutive months through January.

• The national layoff data is a bit stale as it comes on a two month lag. However, the Labor Department’s weekly tally of initial claims for unemployment insurance benefits is very timely. During the week ending February 10, initial claims fell to 212,000, down from 220,000 the week prior. While this is above the September 2022 low of 182,000, it continues to trend at levels historically associated with economic growth.

• As I noted in the Feb. 14 newsletter to paid subscribers, while mentions of layoffs in quarterly earnings transcripts have risen recently, they’re below last year’s levels. And last year’s flood of layoff headlines did not come with a significant move in the aggregate, hard labor market data.

To be clear, this is not to say there’s no chance this is a sign of trouble for the economy. Many economic metrics, including many labor market metrics, have cooled noticeably from very hot levels. There’s certainly a case to be made that we’re closer to the end of this economic expansion than we are at the beginning. (Read more about cooling economic metrics below in TKer’s weekly review of the macro crosscurrents.)

That said, it’s premature to conclude that the layoffs we’re currently reading about in the news is anything outside of what would be ordinary in an economic boom.

A Quick Note About The Stock Market

As TKer Stock Market Truth No. 10 reminds us, the stock market and the economy are not the same thing. (More here, here, and here.)

And so we shouldn’t assume that the metrics that define the U.S. economy will always move hand-in-hand with the stock market, which tends to be driven by earnings.

As BofA’s Savita Subramanian observed in November, there have been numerous years when GDP growth decelerated when S&P 500 earnings growth accelerated.

That is to say, it wouldn’t be crazy if we were to learn that stocks were climbing as the labor market was deteriorating. This topic may warrant a deeper discussion in a future newsletter. Stay tuned…

A version of this post was originally published on Tker.co.