Big Layoffs Look Scary. Why The Job Market Is Still Holding Up.

Job cuts at UPS and Amazon have added to worry about the health of the labor market. (SAMEER AL-DOUMY/AFP via Getty Images)

Key Points

• Despite major layoffs from companies like UPS and Amazon, some indicators suggest a potential pickup in hiring, though the labor market remains vulnerable.
• ADP reported a four-week moving average of 14,250 private-sector job gains for the week ended Oct. 11, up from 10,750 jobs as of Oct. 4.
• The unemployment rate is likely to remain stable at historically low levels, as the low hiring rate is currently balanced by a low layoff rate.

The job market isn’t collapsing just yet, even though companies such as Amazon.com and United Parcel Service have made headlines with major layoffs, the labor data still available show.

This week, UPS said it cut 48,000 employees and Amazon announced 14,000 layoffs, worsening concern that the labor market could start to deteriorate because momentum in hiring has stalled.

There is no question that the labor market is in a vulnerable spot. That will help the Federal Reserve officials justify a quarter-point interest-rate cut on Wednesday, even though the latest data show inflation is still a full percentage point above the 2% target.

Exactly what is going on in the job market is harder than usual to assess because the government shutdown has halted publication of federal labor data. But a few indicators show hiring may be picking up again.

The payroll-processing company ADP, for instance, released a new measure on Tuesday that revealed total private employment grew by a four-week moving average of 14,250 jobs in the week ended Oct. 11. That compares with the four-week average of 10,750 jobs as of Oct. 4.

The pickup suggests that the worst point for job losses may be behind the U.S., though the recovery remains “tepid,” Nela Richardson, ADP chief economist said on a call Tuesday. She cautioned, though, that the weekly data is an estimate and that recent hiring patterns have been volatile week to week.

ADP’s more comprehensive national employment report will be released Nov. 5.

“I think we probably have hit the bottom in terms of the deceleration of employment growth, but at the same time, I do not expect employment growth to go back to 100,000 jobs per month,” says Blerina Uruci, chief U.S. economist at T. Rowe Price. She points out that the four-week moving average of 14,250 job gains is likely in line with the so-called break-even rate of payroll growth, the level at which hiring more or less matches increases in the supply of workers.

That means the unemployment rate is likely to remain largely in check. “My sense is that we continue to see this uneasy equilibrium in the labor market where the unemployment rate is likely stable at historically low levels, but both demand and supply of labor has slowed,” Uruci says.

Beyond the ADP data, the latest NFIB Small Business Optimism Index and Institute for Supply Management purchasing managers indexes for service and manufacturing also showed slight increases in hiring plans.

“It’s difficult to read without official data because the other data are not too reliable. But [it] seems stable rather than rapidly deteriorating,” says Dario Perkins, managing director of global macro at TS Lombard.

Initial claims for unemployment benefits are more difficult to parse, particularly because the comprehensive data issued by the Labor Department have been suspended. State data, however, is available on a limited basis.

Citi estimates that the number of Americans filing for unemployment increased to 232,000 from 220,000 during the week of Oct. 18. That indicates that while claims are ticking higher, they are not at “alarming levels” so far, says Nancy Vanden Houten, lead U.S. economist for Oxford Economics.

That is likely because companies remain in a healthy position, with corporate profits still fairly strong, says Mike Reid, senior U.S. economist for RBC Capital Markets. He continues to see employers allowing staffing levels to decline as people retire, rather than laying off workers, as they seek to keep labor costs under control.

A rise above 275,000 weekly claims would be a concerning sign, he says.

The Federal Reserve Bank of Chicago’s advance estimate of unemployment, which continues to be published because funding for the Fed is independent from the federal budget, rose to 4.35% in October, from 4.34% in September. But that rise is at least partially due to the fact that many workers were furloughed as a result of the shutdown that began Oct. 1.

The risks to the economy increase, however, if layoffs rise when the labor market is already vulnerable, Vanden Houten says. That means that the latest announcements from Amazon and UPS do merit some scrutiny.

“I want to see that these layoffs are broadly based and not from sectors that are struggling or companies that may have over expanded and now are retrenching some of that expansion,” Uruci says. She says she’ll be waiting for the more comprehensive Challenger, Gray & Christmas report, scheduled for next week, to determine if layoffs rose significantly in October.

In September, Challenger reported there was a 37% drop in layoffs compared with August.

For now, the low hiring rate hasn’t resulted in much of a rise in the unemployment rate because the layoff rate is low, Vanden Houten says. “But if layoffs rise and those workers can’t find jobs, it risks triggering a cycle of cuts in consumer spending, leading to more layoffs and so on,” she says.

Her base case, though, is that upper-income households, who are seeing big wealth gains as the stock market rises, will continue to power consumer spending and the economy.

The government shutdown adds to the risks the longer it drags on. Typically, shutdowns create only a small drag on inflation-adjusted gross domestic product growth, and much of the slowdown in economic activity during a shutdown is recovered in subsequent quarters.

But with the current shutdown already the second-longest in U.S. history, the outcome could be worse than in the past. That is especially likely if the Trump administration succeeds in implementing more government layoffs and food assistance and other benefits lapse for significant periods. That could blow a bigger hole in consumer spending than wealthy shoppers are able to fill.

“This shutdown just feels different,” Reid says.

Write to Megan Leonhardt at megan.leonhardt@barrons.com