What do softened business expectations mean for hiring?

In October, we saw a decline in our Fifth District indices for expected demand and business conditions over the next six months, particularly in the services sector. However, employment expectations over the same period remain largely unchanged. This month, firms’ six-month expectations for demand and business conditions remained soft, while near-term employment expectations remained stable.

Every November, we ask businesses about their employment outlook over a longer time horizon: the next 12 months. Long-term employment expectations also appear to remain positive. Compared to last year, a similar share of companies plan to increase employment in the next 12 months. Among companies planning to increase employment, the most cited reasons are high expected sales growth and overworked staff. While nearly four in 10 respondents plan to hire, businesses report recent difficulties in finding workers with the necessary skills, prompting them to look for different ways to meet their workforce needs. Few businesses have planned to cut their workforce unless demand for their products and services unexpectedly declines.

Firms generally expect to either increase or maintain employment in 2024.

When asked about their outlook for employment over the next 12 months, responses were similar but not identical to those in 2022. Thirty-eight percent of firms plan to increase employment, while half plan to keep employment unchanged. Although only 12 percent of businesses said they planned to cut employment, that was a slight increase from last year and the highest share in six years.

Firms planning to increase employment in the next 12 months were asked to rank the three most important reasons. Seventy-seven percent of these businesses plan to hire because expected sales growth is high, while 64 percent say their current staff is overworked.

But finding workers has not been easy for businesses, despite their best efforts

Many businesses plan to hire in the next 12 months, but finding workers with the necessary skills has proven difficult. In fact, just under half of companies report difficulty finding qualified candidates, and 24 percent report candidates are unwilling to accept compensation packages offered. Only 19 percent were able to hire without difficulty.

Firms that reported difficulty hiring workers in the past three months were asked what they had tried to do to attract workers.

Just under half of firms have focused on retention and promotion internally, a similar share have increased compensation, and 32 percent have begun hiring lower-skilled workers and providing on-the-job training. Many businesses have tried several of these approaches to meet labor demand.

How would businesses react if demand unexpectedly dropped?

Although most firms plan to increase or maintain employment in 2024 despite softening near-term expectations for demand and business conditions, an important follow-up question is: How might firms’ employment projections change in the event of a larger-than-expected slowdown in economic activity? To get an idea of ​​how businesses might react, we asked our survey participants how they would react over the next six months if demand for their products and services was 10 percent lower than they currently expect.

Most firms responded that they would reduce the number of staff or hours worked. Thirty-seven percent of firms reported that they would reduce headcount more than currently expected by not replacing workers who leave the firm, 29 percent reported that they would cut headcount through selective layoffs, and 28 percent responded, that they would reduce hours worked more than currently expected. Although 34 percent of firms reported they would maintain current headcount, this still represented a decline in employment expectations. Of the 60 firms that said they would maintain current headcount in the event of an unexpected downturn, 26 had previously said they expected to hire.

Conclusion

Despite softening six-month expectations for demand and business conditions, November employment expectations remain relatively unchanged. Data from the annual questions in our November business surveys showed that 12-month employment expectations also remained positive. Most businesses either plan to hire or retain their workforce in the coming year. A relatively small share of companies plan to reduce employment. In addition, most businesses continue to have difficulty hiring workers and have focused on, among other things, retaining and promoting workers, increasing compensation or hiring lower-skilled workers, and investing in training. However, if they face weaker-than-expected demand, more firms are likely to downsize.


The views expressed are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Richmond or the Federal Reserve System.

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