The robust U.S. labor market is continuing to ward off recession and even slightly raise consumer confidence, but experts say worrisome inflation is already influencing consumer decisions and could potentially impact jobs.
Data released last week revealed a labor market that's holding steady, with open positions continuing to far exceed the number of job seekers. Nonfarm payrolls rose by 431,000 in March, and the unemployment rate declined by 0.2 percentage points to 3.6%, according to data from the U.S. Bureau of Labor Statistics.
The number of unemployed people decreased by 318,000 to 6.0 million, including 5.7 million unemployed people who are seeking a job, the data showed.
Meanwhile, the number of job openings did not change much, totaling 11.3 million on the last business day of February, according to figures from the Job Openings and Labor Turnover Survey (JOLTS), released March 29.
“The number of job openings is at a near-record high. You're at around 1.9 times the number of job openings compared to those looking for jobs right now. That puts a big exclamation mark on how strong the labor demand is.”- Brian Henderson, chief investment officer, BOK Financial®
Earnings growth, inflation woes
The high demand for workers, coupled with wage growth and a strong job market in general, likely contributed to a slight increase in consumer confidence, according to one metric, Henderson said. For the first time in 2022, the Conference Board Consumer Confidence Index® increased month-to-month, rising from 105.7 in February to 107.2 in March.
By contrast, the University of Michigan's Survey of Consumers, another market-moving consumer sentiment index, sank to its lowest level since 2011 in early March.
"That was coming out of the financial crisis, so consumers' mood was not very good back then. That's also the level where we are," Henderson said. "A lot of it now has to do with inflation, which is just going higher and higher. People are concerned that although their wages are going up, it's not enough to overcome the higher prices on virtually everything."
Prices, as measured by the U.S. Bureau of Economic Analysis's Personal Consumption Expenditures (PCE) Index, increased by 6.4% in February compared to one year ago. "Inflation is remaining very high and broadening out quite a bit," Henderson said, noting that it's no longer just due to higher car prices and the supply of other goods constrained by supply chain issues.
In response to the continuing inflation, the Federal Reserve will likely be more aggressive with interest rate hikes this year, Henderson said. He believes the Fed will move interest rates by 50 basis points—that is, by half a percentage point—in May and then again in June.
However, two of the areas where consumers are feeling inflation the most—food and energy—historically are not included in the Fed's monetary policy decisions because those categories are prone to price volatility, said Steve Wyett, chief investment strategist for BOK Financial. According to the PCE Index, energy prices have increased 25.7% from last year and food prices have increased 8%.
"What inflation forces U.S. consumers to do is to make choices they haven't had to make in the past," Wyett said. To the degree that food and energy—and particularly food—are needs rather than wants, then you're going to make sure that you meet those basic needs. Where it's going to come from is reduced spending on discretionary items."
Consumers dining out less
So far, the three areas where consumers are cutting their spending the most are dining out, driving and monthly subscription services, according to a March CNBC/Momentive poll. More than half (53%) of respondents said they had reduced spending on dining out in the past six months because of higher prices, and 52% said they would consider this move in the future if high prices persist.
If consumers dining out less leads to reduced hiring by restaurants and bars, that could be an "early sign that inflation is having a detrimental effect on the job market," Wyett said. He said that the labor market, inflation and the Fed's reaction to it are key factors to watch going forward.
"We have to get people into the job market," Wyett said, referring to the 62.4% labor force participation rate, which changed little in March. Not only will it help improve the economy's output capacity by reducing supply chain issues, but it will also help mitigate the effects of inflation on consumers, he explained.
"Consumers with a job are better able to handle inflation than consumers without a job," he said. "As long as the labor market stays healthy, we can reduce the chances of a recession."
“Consumers with a job are better able to handle inflation than consumers without a job. As long as the labor market stays healthy, we can reduce the chances of a recession.”- Steve Wyett, chief investment strategist, BOK Financial