The Economy Explained, February 2024 – Early momentum, inflation progress, talent “normalization.”

Welcome to the February 2024 installment of The Economy Explained, with Gusto!

The job of the Gustonomics team is to make you smart about the economy to help you advise your clients. We know they are asking you questions about this. In this video, you’ll get a sense of what is happening in the economy, what that means for businesses, and what to keep an eye on in the coming months. You can also download the The Economy Explained one-pager to share.

Key Trends

• Labor markets are loosening (a little). Labor markets continue to improve, with 1.4 jobs per unemployed worker, down from 1.6 in November 2023. Across the board, pay growth for new hires appears to be normalizing between +2-7% y-o-y for most industries. Whether your clients feel that talent conditions have improved over the last few months depends on which industry they are in – tech talent continues to be looser than business services or consumer-facing services. Yet, both employers and workers seem to be coming into more alignment regarding expectations, with quits decreasing y-o-y and employers reporting somewhat easier talent conditions.
• Progress on inflation gave momentum to the real economy. The Fed’s preferred measure of inflation came down to +2.9% over the last 12 months, ahead of expected timetables to bring down inflation. This development brings two benefits. First, bringing inflation down creates more price stability and increases real incomes, good for both businesses and workers. Second, this progress means there’s a path for the Fed to start decreasing interest rates before the end of 2024, helping finance-intensive industries that have been sluggish due to the high cost of financing – like equity investments, construction and home sales. 
• Risks, but not major headwinds, on the horizon. The economy has a lot of momentum going into 2024, with strong spending and high optimism for future interest rate cuts. We’re keeping an eye on a few risks that could put a damper on economic activity in the first half of the year. The first is logistics and supply chain dysfunction stemming from global shipping disruptions. The second is the delinquency rate on consumer loans, which have been rising at a fast clip over the last few months and might be signaling consumer stress (or it might be nothing). These are risks we’re watching, not definite drags on the economy.   

So, what does that mean for businesses in the coming months? Our advice:

1. Plan for modest to moderate pay increases, consider long-term workforce composition. Moderate pay increases are firming up as a staple feature of post-pandemic labor markets. Companies can start to incorporate expectations for these regular increases into their long-term financial planning. Help companies take the long view and decide whether their workforce composition is optimal, or whether investments in contracting relationships. Many companies are still at replacement hiring now, not expansion hiring. We have seen reports of companies reducing or eliminating signing bonuses, and Gusto’s New Hire Pay Index also shows continued slowdowns in candidate expectations for compensation. However, the talent market is still tight, with 1.6 job openings for every unemployed worker, and that means businesses should keep listening to workers and invest in building engagement for current staff.  
2. Keep putting off financed investments if you can . We have a path to rate cuts earlier than expected this year. Maximizing cash flow positivity is going to be key to help businesses avoid going to capital markets for financing, as well as building up retained earnings to act as a cushion against unexpected expenses or cash-negative periods. 
3. Build up (a bit more) inventory and be attentive to consumers. As we predicted, consumers remain resilient, though they are more price sensitive. Businesses should pay special attention to whether their customers are becoming more price sensitive in order to make adjustments quickly if needed. And, hedging against supply chain risks, businesses may benefit from stockpiling a bit of extra inventory if they are critically dependent on Asia-based supply chains.

In closing, as always, we advise folks to think of the economy like the weather. What the forecast means for you and your business, or your clients’ business, depends on a lot of specific factors. Do you need to go outside while it’s raining? Does your roof have a leak? Do you sell umbrellas? 

Gusto partners can access additional one-pagers in Gusto Pro for 19 industries and 31 metro areas, and find company-specific data using People Analytics to tell the full people story for their clients. 

Thanks and see you all next time!