Could falling inflation trigger layoffs?

(NewsNation) — The recent slowdown in inflation is usually an indication of the economy getting back on its feet, but recent layoffs are leaving people to question whether this is true.

While easing inflation has provided relief to consumers and driven the stock market to new highs, some economists warn that it may lead to a downturn as corporate profit margins narrow.

The drop in price increases, coupled with softening consumer demand, could result in reduced pricing power for companies, affecting profit margins. Kathy Bostjancic, chief economist of Nationwide, told USA Today that falling profit margins have historically been accompanied by rising unemployment rates in past recessions.

Amid the uncertainty, the overall economic picture seems solid, with the S&P 500 hitting a record and consumer sentiment rebounding close to historical averages. Despite high interest rates and inflation, consumer spending has remained resilient, and most economists no longer forecast a recession in 2024.

However, recent layoffs announced by major companies such as TikTok, Macy’s, Google, Wayfair, Amazon, Citigroup and Universal Music have raised concerns about the potential impact on the job market. While just 10% of S&P 500 companies have reported fourth-quarter earnings, estimates suggest that profit margins for the entire season will average 10.9%, the lowest since late 2020.

The rapid rise in inflation in 2022, driven by pandemic-related spending sprees and supply chain bottlenecks, has since slowed but remains above the Federal Reserve’s 2% target at 3.4%. The past year saw companies coping with higher wholesale costs and borrowing expenses due to Fed rate hikes, leading to a streak of falling S&P 500 earnings, known as an earnings recession.

While some experts expect profit margins to rebound in the first half of this year, others express concerns about the potential for widespread layoffs. Ed Clissold of Ned Davis Research told USA Today that companies have been boosting profit margins by reducing shipping costs as supply chain issues resolve, a trend expected to continue in 2024.

Economists like Bostjancic worry that service companies, which make up 80% of the economy, may face declining sales alongside rising employee wages. Average hourly pay grew by 4.1% annually in December, and Bostjancic expects consumer spending to soften due to delayed effects of Fed rate hikes, credit card delinquencies and the depletion of pandemic-related savings, USA Today reported.

Despite differing opinions on the economic outlook, concerns linger about the potential for job losses in 2024. Bostjancic anticipates 1.6 million job losses this year, pushing the unemployment rate from 3.7% to 4.8%. The caveat, however, lies in the unusually strong productivity growth over the past year, driven by technology and other improvements. If this trend continues, it could mitigate the impact on businesses, allowing them to raise wages without significant blows to earnings or job cuts.