Calm Before the Storm: Strategic Workforce Planning to Face a Possible Recession

Although a mild recession is predicted for later this year, the U.S. economy added far more jobs in January than was expected, and unemployment fell to its lowest in more than 50 years. Demand for labor is more robust than predicted, and revised 2022 and 2021 data show even greater job increases than previously reported.

The news builds on positive trends observed in Q4 2022. Still, economists advise organizations to stay cautiously optimistic, suggesting that slowing in the first half of 2023 may result in a mild recession by the end of Q2.

Our team recommends using this “calm before the storm” to devise workforce strategies to help your organization weather future economic challenges.

Calm before the storm

Some Q4 2022 economic indicators presented a positive outlook for employers:

• Recovering GDP and more growing sectors. Overall, more industries are growing, and fewer are shrinking.
• Strong labor market. The total unemployment rate is decreasing, and the labor force participation rate is increasing.
• Steady job growth. After two years of consistent growth, job growth is slowing down to 300,000 new jobs per month over the past five months from a high of 500,000 per month.
• Fewer long-term unemployed. The percentage of those jobless for 27 weeks or more declined by 12% in the last year and stands at 20%.

Proceed with caution into the storm

Last quarter’s – and this January’s – positive economic indicators are only part of the big picture for organizations planning and implementing their 2023 workforce strategies. Employers should be mindful of the following labor trends:

• Persisting number of unemployed per job opening. In Q4 2022, the number of unemployed people per U.S. job opening was 0.6 – nearly two jobs for every unemployed person.
• Job losses. While approximately 160,000 tech workers were laid off in 2022, many recent layoffs are a correction for overly aggressive hiring during the pandemic and accelerated investment in artificial intelligence (AI). Additionally, most tech sector losses resulted from quits (7 out of 10). Non-tech sectors, on the other hand, continue to grow, albeit at a slower pace.
• Elevated employment costs. Costs for employers were up 5% in Q4 2022, aligning with average increases in hourly earnings.
• Fragile consumer confidence. Consumers have remained surprisingly resilient, even though worker salary increases have not kept pace with price increases. But this confidence is fragile; a dip could lead to recession, as GDP is driven by consumer spending.
• Rising interest rates. The biggest concern with the Fed’s measures to slow the economy is overcorrection. We could see a sudden and unexpected economic downturn if they don’t put the brakes on the tightening quickly enough.

Despite these cautionary trends, some employers plan to add new employees over the next six months, believing that demand for goods or services will rebound in the first half of this year, even after recent revenue decreases.

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Weathering the Storm

In light of these conflicting indicators, organizations need to plan for any possible economic situation over the coming months. Employers should prepare the following strategies:

1. Contingency plans. Organizations must consider multiple economic scenarios and have a plan for each. What should their labor strategy look like if a recession occurs and organizations experience a decrease in demand? Knee-jerk reactions such as layoffs hurt your employment brand. Instead, consider other levers to control labor, such as contingent labor.
2. Strategic labor opportunities. Tie your workforce plan directly to your strategic economics. For example, if your sector is struggling, consider luring key talent away from competitors. When considering investments in automation, look carefully at long-term ROI. An investment now could pay dividends later, including cost reduction and reliability of supply.
3. Compensation management. Organizations can take a strategic look at their compensation and determine the right strategy for them rather than just reacting to market forces. It is also a great time to optimize the entire employee value proposition, not just compensation.
4. Employment brand strategies. With low unemployment, high competition and changing workforce demands, now is the time to manage your employment brand. A strong brand can help you in good times and bad, enabling you to get the employees you want at the right price – and keep them. What companies do and how they do it during downturns has a lasting impact on employment brand.
5. Work environment strategies. Organizations have made radical shifts in the work environment since 2020. Many are not going back to the five-day, onsite work week, even though some have seen productivity and collaboration decrease. As the labor market softens, evaluate workforce strategy in relation to your employment brand and your compensation strategy.

It is more critical than ever to have a nimble workforce strategy that can respond to whatever economic scenario may come. There is an urgency to build a more robust set of options and take advantage of the available opportunities for developing the agility and resilience to thrive through economic ups and downs.

For more advice on preparing your organization for the ebbs and flows of 2023, contact hrQ.