Why Are Businesses Still Hiring as Recession Risks Mount?

One cost-cutting measure is off the table. “We’re not looking at any layoffs at this time,” Ms. Portner-Smith said.

The Bird-in-Hand inn could use roughly a dozen more workers. Its staffing needs include more housekeepers and front-desk workers to ease the burden on managers, who are often taking on tasks such as room cleanings and reservations, said Ms. Portner-Smith. The hotel is operating with about 50 employees, down from 70 before Covid-19 hit in early 2020.

“Even though business has slowed down and it’s not where we expected it to be, our staffing isn’t where it should be yet,” Ms. Portner-Smith said. “It’s really hard when you have to tell a guest, ‘I’m sorry, we just don’t have the staff to do it.’”

Businesses across the U.S. have seen demand for goods and services cool as inflation has risen and the Federal Reserve has increased interest rates. The U.S. economy shrank at an annual rate of 0.9% from April through June, marking the second consecutive quarterly contraction and raising concern among economists that a recession is near, if not already here.

Growth in the labor market is also slowing, with companies such as

Robinhood Markets Inc.

laying off workers, more people filing for unemployment insurance and some labor data pointing to cracks forming in demand for workers.

Yet employers so far have continued to hire. The U.S. added 372,000 jobs in June, and economists surveyed by The Wall Street Journal think Friday’s jobs report will show that they added more than 250,000 in July.

Payrolls have grown faster during the first half of this year than during any other post-World War II period when the economy began contracting. Regardless of whether a recession is eventually declared, the latest economic figures show that output is weakening much faster than the job market.

The disconnect between the growing job market and otherwise faltering economy boils down to one key point: Despite slowing consumer demand, the supply of workers to make goods and provide services has been considerably below companies’ needs.

Employers in many cases haven’t been able to find nearly enough employees following job cuts during the short, deep recession of early 2020. Others that have returned to prepandemic employment levels are hesitant to lay off workers, given the difficulty they have experienced rehiring after pandemic shutdowns. The unusual labor-market dynamic puts the U.S. economy in a stronger position to weather a downturn than in the past, according to some economists.

“Labor demand is strong enough that workers who are losing their jobs are likely to find new ones much faster than in a typical downturn,” said

Bill Adams,

chief economist at Comerica Bank. “That will largely interrupt the vicious cycle of a recession where job losses trigger cutbacks in consumer spending and less revenue for businesses, which forces additional layoffs.”

In recessions, companies are typically slow to lay off as demand declines, but layoffs typically pick up sharply once that cycle gets going. In the past seven decades, U.S. recessions have always been accompanied by a rise in the unemployment rate, with a median increase among post-World War II recessions of 3.5 percentage points.

Some large firms including

Ford Motor Co.

,

Twitter Inc.

and the real-estate brokerage

Redfin Corp.

have recently laid off workers or signaled cuts. No one knows whether the U.S. economy will spiral into a steeper downturn with sharp cutbacks in consumer spending, but such a scenario would almost certainly entail more layoffs. Some economists say that June’s 3.6% jobless rate will need to rise much higher for the Fed’s preferred inflation gauge to fall from a four-decade high of 6.8% to closer to its 2% target.

While there are signs that the labor market has cooled in recent months, it remains unusually tight. Jobless claims, a proxy for layoffs, have increased since hitting a half-century low this spring, but they remain historically low. U.S. job postings fell in June to their lowest level in nine months, the Labor Department said on Tuesday, but the total is still historically high and well above the number of unemployed people seeking work. Postings on the job site Indeed.com were 54% above prepandemic levels in late July. There are fewer workers seeking jobs than before the pandemic hit.

Some industries, including professional and business services, retail and manufacturing, have surpassed their prepandemic employment levels. But firms in these sectors have seen demand far outstrip their abilities to add employees. For instance, job openings in transportation, warehousing and utilities have surged nearly 78% since February 2020 as Americans binged on goods. Companies in the sector have hired just 14% more workers in the same period.

Many companies laid off large numbers of workers in spring 2020 and still haven’t returned to prepandemic staffing levels. Leisure and hospitality employers, including restaurants, bars and hotels, have struggled to rebuild workforces fast enough to keep up with consumer spending. The sector could provide a key source of job growth this year as it continues to recover, according to economists.

“You hear stories of tech startups laying people off, but that’s not the story in every sector,” said

Brett Ryan,

senior economist at Deutsche Bank. “Leisure and hospitality jobs are still down a million relative to pre-Covid. So there’s still competition for lower-wage, high-contact services jobs.”

As part of a strategy to help attract and retain staff, Bird-in-Hand Family Inn is paying an extra dollar an hour to workers and offering a $400 incentive for employee referrals provided that new workers stay on at least 90 days, Ms. Portner-Smith said.

“Housekeeping is one department where we really, really struggle,” she said. “People just don’t want to do it anymore.”

Three tour buses checked out on the same day this summer. Without enough housekeepers, the management team stripped bed linens and took out towels and trash to prepare the rooms for the next guests. The inn has also faced challenges hiring enough employees to handle reservations at the front desk, sometimes leading to a buildup of voice messages, Ms. Portner-Smith said. She recently called six applicants for front-desk jobs. One candidate hung up on her.

According to a monthly survey by the National Federation of Independent Business, small-business owners in June were the most pessimistic about future business conditions than at any point in the survey’s 48-year history. At the same time, half of small-business owners reported job openings that they couldn’t fill in June, just shy of a 48-year record high in May, according to the NFIB.

Companies are probably in many cases reluctant to fire because of the expense and hardship of staffing up, said

Susan Sterne,

economist at Economic Analysis Associates.

“What I worry about is that if you tell people forever there’s a shortage, they have the tendency to hire too many,” Ms. Sterne said. “Eventually, the need to maintain profitability will overwhelm any shortage concerns—if they even still exist—and they will start reducing employment. You can already see that happening for retailers.”

Nonfarm payrolls fell by nearly 22 million at the beginning of the pandemic. Rehiring has helped boost payrolls by a monthly average of about 800,000 beginning in May 2020. But payrolls are quickly approaching their prepandemic peak. As a result, rehiring will likely fade as a source of job growth in the latter half of this year, according to economists.

Morgan Stanley economists expect much of the slowdown in job gains this year will be related to a weaker pace of hiring as opposed to increased rates of firing. Company earnings calls indicate that employers “have largely filled the ‘need to have’ positions and are poised to close postings for the ‘nice to have’ positions after being unable to fill them for some time,” they said in a note.

In June, Jeff Vojta, owner of Dilworth Coffee, pulled the few job ads he had posted for his coffee roasting, wholesale and distribution firm based in Raleigh, N.C. Mr. Vojta is increasingly worried about the fast-rising costs to run his business, including the price of coffee beans and cups he sells to small coffee shops and restaurants.

His clients are finding that customers are buying smaller and cheaper coffee drinks to combat more expensive cups of joe. Still, Mr. Vojta is far from considering layoffs and might outsource some customer-support positions to meet demand, which, though slowing, is still solid.

“We’ve tentatively explored some options with overseas firms for customer support,” he said. “Because we don’t want to live through what we went through in the last 18 months.”

For much of the past year and a half, Mr. Vojta struggled to fill job openings. Four or five times candidates accepted a position and signed the onboarding paperwork, only to never show up.

“After getting burned, we were getting to the point in February or March of this year where we were like, ‘Let’s overhire,’” he said. “Then gas prices started going up, and we were like, ‘Well, maybe that isn’t so smart.’”

Write to Sarah Chaney Cambon at [email protected] and Gwynn Guilford at [email protected]

One cost-cutting measure is off the table. “We’re not looking at any layoffs at this time,” Ms. Portner-Smith said.

The Bird-in-Hand inn could use roughly a dozen more workers. Its staffing needs include more housekeepers and front-desk workers to ease the burden on managers, who are often taking on tasks such as room cleanings and reservations, said Ms. Portner-Smith. The hotel is operating with about 50 employees, down from 70 before Covid-19 hit in early 2020.

“Even though business has slowed down and it’s not where we expected it to be, our staffing isn’t where it should be yet,” Ms. Portner-Smith said. “It’s really hard when you have to tell a guest, ‘I’m sorry, we just don’t have the staff to do it.’”

Businesses across the U.S. have seen demand for goods and services cool as inflation has risen and the Federal Reserve has increased interest rates. The U.S. economy shrank at an annual rate of 0.9% from April through June, marking the second consecutive quarterly contraction and raising concern among economists that a recession is near, if not already here.

Growth in the labor market is also slowing, with companies such as

Robinhood Markets Inc.

laying off workers, more people filing for unemployment insurance and some labor data pointing to cracks forming in demand for workers.

Yet employers so far have continued to hire. The U.S. added 372,000 jobs in June, and economists surveyed by The Wall Street Journal think Friday’s jobs report will show that they added more than 250,000 in July.

Payrolls have grown faster during the first half of this year than during any other post-World War II period when the economy began contracting. Regardless of whether a recession is eventually declared, the latest economic figures show that output is weakening much faster than the job market.

The disconnect between the growing job market and otherwise faltering economy boils down to one key point: Despite slowing consumer demand, the supply of workers to make goods and provide services has been considerably below companies’ needs.

Employers in many cases haven’t been able to find nearly enough employees following job cuts during the short, deep recession of early 2020. Others that have returned to prepandemic employment levels are hesitant to lay off workers, given the difficulty they have experienced rehiring after pandemic shutdowns. The unusual labor-market dynamic puts the U.S. economy in a stronger position to weather a downturn than in the past, according to some economists.

“Labor demand is strong enough that workers who are losing their jobs are likely to find new ones much faster than in a typical downturn,” said

Bill Adams,

chief economist at Comerica Bank. “That will largely interrupt the vicious cycle of a recession where job losses trigger cutbacks in consumer spending and less revenue for businesses, which forces additional layoffs.”

In recessions, companies are typically slow to lay off as demand declines, but layoffs typically pick up sharply once that cycle gets going. In the past seven decades, U.S. recessions have always been accompanied by a rise in the unemployment rate, with a median increase among post-World War II recessions of 3.5 percentage points.

Some large firms including

Ford Motor Co.

,

Twitter Inc.

and the real-estate brokerage

Redfin Corp.

have recently laid off workers or signaled cuts. No one knows whether the U.S. economy will spiral into a steeper downturn with sharp cutbacks in consumer spending, but such a scenario would almost certainly entail more layoffs. Some economists say that June’s 3.6% jobless rate will need to rise much higher for the Fed’s preferred inflation gauge to fall from a four-decade high of 6.8% to closer to its 2% target.

While there are signs that the labor market has cooled in recent months, it remains unusually tight. Jobless claims, a proxy for layoffs, have increased since hitting a half-century low this spring, but they remain historically low. U.S. job postings fell in June to their lowest level in nine months, the Labor Department said on Tuesday, but the total is still historically high and well above the number of unemployed people seeking work. Postings on the job site Indeed.com were 54% above prepandemic levels in late July. There are fewer workers seeking jobs than before the pandemic hit.

Some industries, including professional and business services, retail and manufacturing, have surpassed their prepandemic employment levels. But firms in these sectors have seen demand far outstrip their abilities to add employees. For instance, job openings in transportation, warehousing and utilities have surged nearly 78% since February 2020 as Americans binged on goods. Companies in the sector have hired just 14% more workers in the same period.

Many companies laid off large numbers of workers in spring 2020 and still haven’t returned to prepandemic staffing levels. Leisure and hospitality employers, including restaurants, bars and hotels, have struggled to rebuild workforces fast enough to keep up with consumer spending. The sector could provide a key source of job growth this year as it continues to recover, according to economists.

“You hear stories of tech startups laying people off, but that’s not the story in every sector,” said

Brett Ryan,

senior economist at Deutsche Bank. “Leisure and hospitality jobs are still down a million relative to pre-Covid. So there’s still competition for lower-wage, high-contact services jobs.”

As part of a strategy to help attract and retain staff, Bird-in-Hand Family Inn is paying an extra dollar an hour to workers and offering a $400 incentive for employee referrals provided that new workers stay on at least 90 days, Ms. Portner-Smith said.

“Housekeeping is one department where we really, really struggle,” she said. “People just don’t want to do it anymore.”

Three tour buses checked out on the same day this summer. Without enough housekeepers, the management team stripped bed linens and took out towels and trash to prepare the rooms for the next guests. The inn has also faced challenges hiring enough employees to handle reservations at the front desk, sometimes leading to a buildup of voice messages, Ms. Portner-Smith said. She recently called six applicants for front-desk jobs. One candidate hung up on her.

According to a monthly survey by the National Federation of Independent Business, small-business owners in June were the most pessimistic about future business conditions than at any point in the survey’s 48-year history. At the same time, half of small-business owners reported job openings that they couldn’t fill in June, just shy of a 48-year record high in May, according to the NFIB.

Companies are probably in many cases reluctant to fire because of the expense and hardship of staffing up, said

Susan Sterne,

economist at Economic Analysis Associates.

“What I worry about is that if you tell people forever there’s a shortage, they have the tendency to hire too many,” Ms. Sterne said. “Eventually, the need to maintain profitability will overwhelm any shortage concerns—if they even still exist—and they will start reducing employment. You can already see that happening for retailers.”

Nonfarm payrolls fell by nearly 22 million at the beginning of the pandemic. Rehiring has helped boost payrolls by a monthly average of about 800,000 beginning in May 2020. But payrolls are quickly approaching their prepandemic peak. As a result, rehiring will likely fade as a source of job growth in the latter half of this year, according to economists.

Morgan Stanley economists expect much of the slowdown in job gains this year will be related to a weaker pace of hiring as opposed to increased rates of firing. Company earnings calls indicate that employers “have largely filled the ‘need to have’ positions and are poised to close postings for the ‘nice to have’ positions after being unable to fill them for some time,” they said in a note.

In June, Jeff Vojta, owner of Dilworth Coffee, pulled the few job ads he had posted for his coffee roasting, wholesale and distribution firm based in Raleigh, N.C. Mr. Vojta is increasingly worried about the fast-rising costs to run his business, including the price of coffee beans and cups he sells to small coffee shops and restaurants.

His clients are finding that customers are buying smaller and cheaper coffee drinks to combat more expensive cups of joe. Still, Mr. Vojta is far from considering layoffs and might outsource some customer-support positions to meet demand, which, though slowing, is still solid.

“We’ve tentatively explored some options with overseas firms for customer support,” he said. “Because we don’t want to live through what we went through in the last 18 months.”

For much of the past year and a half, Mr. Vojta struggled to fill job openings. Four or five times candidates accepted a position and signed the onboarding paperwork, only to never show up.

“After getting burned, we were getting to the point in February or March of this year where we were like, ‘Let’s overhire,’” he said. “Then gas prices started going up, and we were like, ‘Well, maybe that isn’t so smart.’”

Write to Sarah Chaney Cambon at [email protected] and Gwynn Guilford at [email protected]