Economic growth remains healthy as labor market cools, officials say

Without going so far as predicting it himself, a Federal Reserve Bank of St. Louis economist said at an Aug. 14 Springfield Area Chamber of Commerce event that a “soft landing” is still likely for the U.S. economy, based on current economic data.

The soft landing – in which inflation subsides but overall economic activity doesn’t significantly deteriorate into a recession – appears to be a realistic possibility when considering current economic growth remains healthy, inflation pressures are again moderating and labor markets are cooling, said Charles Gascon, St. Louis Fed senior economist. Gascon spoke at the chamber’s annual Economic Outlook event, held at the Oasis Hotel & Convention Center.

This year’s gathering drew roughly 425 people – up from approximately 360 in 2023, according to chamber officials. The event was organized by the Springfield Business Development Corp., the chamber’s economic development arm.

“We’re receiving a continuation of trends over the first half of the year, and it does seem like there’s the signs in place for what a lot of commentators have been calling a soft landing,” Gascon said.

Gascon noted 2023 was characterized by strong economic growth and job gains, combined with low unemployment rates. The U.S. jobless rate finished the year at 3.8%, while Missouri was at 3.3% and the Springfield metropolitan statistical area was 2.7%. All three have ticked up over the first half of this year – the U.S. at 4.3% for July, while the most recent unemployment data for Missouri and the Springfield MSA are 4.2% and 3.8%, respectively, for June, according to the U.S. Bureau of Labor Statistics.

“When we look back at the beginning of 2023, a lot of people expected there to be a recession,” he said. “What we ended up seeing was that actually in 2023 growth outpaced that of 2022 and was actually about in line with what it was in 2021. So, really healthy output growth coming through 2023 as we saw continued fiscal tailwinds that were helping this economy and just a relatively stabilization as inflation pressures started to moderate.”

Tight market
While the year had a slow start with higher-than-expected U.S. inflation reports, averaging 4.2% over the first four months, Gascon said the month-over-month increases in May and June were both under 1%.

“A key theme in the first half of the year was that it seemed like there was upward pressure continuing to build on inflation, and we weren’t seeing the cooling of inflationary pressures that were anticipated,” he said. “Most recent data for May and June for (personal consumption expenditures) is definitely much more consistent with our cooling.”

The newly released national inflation rate was 2.9% for the 12 months ending in July. It’s the first time since 2021 the rate dipped below 3% and puts the Federal Reserve closer to its 2% inflation target. While the Fed held rates steady at the most recent meeting at the end of July, it signaled a possible rate cut at its September gathering.

The federal funds rate remains at a target range between 5.25% and 5.50%. The Fed has not changed the benchmark rate since July 2023 in hopes of allowing inflation to fade while the economy still grew. As of Aug. 14, there’s a 64.5% chance of a 25-basis point rate cut in September, according to the CME Group’s FedWatch tool, and 35.5% odds they’ll cut it by 50 basis points.

Other topics Gascon said have come up a lot are labor productivity and divergency in consumer markets. He said households are becoming increasingly price sensitive. In response, some consumer-facing retailers are focused on using discounts and promotions to drive sales. 

“We still have a very tight labor market and it’s increasingly challenging to hire new workers, and firms can’t just pass on their higher labor costs and higher prices to households because households are saying, ‘No, I’m just not going to pay an extra $200 for a bicycle anymore. I want the deal that I had before.’”

The current demand for workers and the available labor force supply are getting more in balance with historical data and where it was as recently as 2019, according to Gascon. He added the gap between the two in June was roughly 1 million potential workers on a base of 170 million positions.

“So, 1 million out of 170 million is pretty good,” he said. “I would say that’s a balance versus these big gaps where we had almost an 8 to 10 million gap between demand and supply,” he said about parts of the past five years.

Feeling effects
However, local employers are among those feeling the tight labor market effects.

Bay Mourer, business development manager with Nabholz Construction Corp., was among those in attendance at the chamber event. He said in his industry there’s always a need for new people.

“You always need to feed the pipeline, and it’s difficult to get younger generations to be focused on something like building a new building, building new homes,” he said. “It’s not as appealing as some other industries that are out there. We really need more focus on the trades from a labor shortage perspective.”

Sean Balisle, managing shareholder at KPM CPAs & Advisors, said after the event the market has long been tight in public accounting.

“There’s fewer people going into accounting, and then just coupled with the growth, it just creates a tight labor market,” he said.

KPM CPAs is among the nation’s top revenue-producing accounting firms, according to Accounting Today. The publication earlier this year released its annual list of the top 100 U.S. firms, along with regional leaders and fast-growing companies. KPM CPAs ranked No. 21 on the Midwest regionals list with $18.7 million in annual revenues.

“I wouldn’t say we’re short,” Balisle said of the company’s current staff of 90. “We can manage with 90 now. Our employee counts change during the year based on our busy time starting in January. We’ll go up to about 100 people. We can get the work done without having to work an unreasonable amount of hours, and that’s kind of what our goal is. But we don’t really have a lot of excess capacity for potential workforce growth. That’s really the problem.”

While Mourer is very optimistic for 2025 construction projects – particularly in the municipal and civic areas – he said the price of materials and consumer goods are not decreasing as much as desired.

“The cost of construction still remains relatively high,” he said.

As weaker spending is projected for the remainder of 2024, Gascon said it indicates modestly slower gross domestic product growth by year’s end, both nationally and locally. Citing IHS Markit data, he said GDP growth in the U.S. is expected to finish 2024 up 1.9% year-over-year, compared to 3.2% growth in 2023. For the Springfield MSA, GDP growth is projected to finish above the national mark at 3.2%. That’s down from the 4.4% year-over-year increase in 2023.

As for chances a recession appears anytime soon, Gascon said he won’t make a prediction. He said probabilities for one in 2023 were high and didn’t come to pass.

“It’s definitely still a concern in the economy. It got a lot of emphasis with the last jobs report coming in a bit lower than expected,” he said, in reference to U.S. employers adding just 114,000 jobs in July – 35% below expectations. “But I would just note that recessions are incredibly hard to predict, and so that’s not ever going to be in my baseline forecast unless we can actually see today that we’re already in a recession, because it’s just very unlikely to predict the shocks that are going to occur.”

The chamber’s annual series continues with the Nonprofit Outlook, which debuted last year. The second annual event is set for Oct. 30 at the DoubleTree by Hilton hotel.