After two straight years of record-setting payroll growth following the pandemic-related disruptions, the labor market is starting to show signs of stress. That suggests 2023 could bring slower hiring or outright job declines as the overall economy slows or tips into recession.

Employers added 223,000 jobs in December, the smallest gain in two years, the Labor Department said Friday. Average hourly earnings were up 4.6% in December from the previous year, thenarrowest increasĚýsince mid-2021, and down from a March peak of 5.6%.

All told, employers added 4.5 million jobs in 2022, the second-best year of job creation after 2021, when the labor market rebounded from Covid-19 shutdowns and added 6.7 million jobs. Last year’s gains were concentrated in the first seven months of the year. More recent data and aĚýwave of tech and finance-industry layoffsĚýsuggest the labor market, while still vibrant, is cooling.

“I do expect the economy to slow noticeably by June, and in the second half of the year we’ll see a greater pace of slowing if not outright contraction,” saidĚýJoe Brusuelas, chief economist at RSM U.S.

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In an Economic Trends communication from the university, Goss shares his rationale for each possibility.

V-Shaped

The May U.S. jobs report indicated the economy added 2.5 million jobs, the highest addition on record.

Record federal deficit spending via the CARES Act, and the Federal Reserve’s support for ultra-low interest rates, are punishing savers and rewarding spenders.

The end of state lockdowns is pushing consumers to spend.

The end of the $600 weekly boost to unemployment benefits expires in July, which will stimulate the labor market.

Also indicative of a V-shaped recovery: U.S. equity markets are pricing in an economic revival with expanding business profits.

Swoosh-Shaped

The nation’s leisure and hospitality industry has shed 7 million employees since COVID-19. Contrary to most recessions, this one was led by the consumer, and spending data does not suggest a return to pre-COVID spending levels. State and local regulations have dramatically limited business capacities.

U.S. bond yields are at roughly half of where they were before the pandemic, and gold prices are up more than 7 percent. These are safe havens for risk averse investors, which indicates investors remain extremely cautious.

U.S. exports and imports both posted their largest monthly decreases on record. Imports fell 13.7 percent between March and April and exports fell 20.5 percent during the same time. These are the largest declines since record-keeping began.

W-Shaped Recovery

Rising rates of infection and death would wreck an economic rebound.

Growth based on federal government deficit spending and Federal Reserve’s ultra-low interest rates is not sustainable.

Consumers in the U.S. and abroad must return to work and spending.