The November jobs report was a blowout number, and the U.S. labor market remains strong, but behind the scenes at some of the largest U.S.-based corporations, expectations about the number of job openings and pace of hiring in 2020 have come down. Sixty percent of chief financial officers say a head count reduction will be the most likely staffing trend for their companies over the next 12 months, according to the CNBC Global CFO Council survey for the fourth quarter 2019.
CFOs are not pessimistic on the economy. The Q4 CNBC survey finds a minority — only 15% of U.S. CFOs — think a recession will occur next year. Their fears about U.S. trade policy as the biggest risk to their business have declined (15% cited trade as the biggest external risk this quarter). But there are reasons the biggest employers may be poised to pull back on staffing, according to economic and labor market experts. And there are a few key recent market numbers that support the negative jobs forecast.
While the November nonfarm payroll report showed U.S. companies adding way more jobs than expected across many sectors and the unemployment rate ticked back down to 3.5%, the lowest since 1969, jobs platform Glassdoor pointed to another November key reading from its labor market tracking: the largest employers (5,000 employees+) have cut back on job openings in the year-over-year period through November by 6%.
"Job-openings growth in the last year or so has been slower for large employers," said Daniel Zhao, senior economist and data scientist at Glassdoor. Zhao said of the 6% decline in November: "It stumbled well below the trend."
North America was the only of the three regions in which CFOs were surveyed by CNBC where the majority of CFOs expect head count to go down.
The Glassdoor economist said job openings are a more forward-looking indicator than the monthly nonfarm payroll report, and there are times during economic cycles when there is "a little disconnect between job growth and job openings ... an inflection point between these two that shows employment growth going down."
Jobless claims reported on Thursday were at highest level since 2017. A sudden rise, if it persists, is a warning on the economy, even with a good monthly jobs report. Claims are viewed as more real time and an early warning indicator.
But Zhao and other experts do not expect a major turn in the labor market trend.
Gad Levanon, chief economist, North America, for The Conference Board, said the November report was probably an outlier — if it did make most economists a little more optimistic — but his prediction remains moderate to slowing employment growth next year, but still a positive growth rate.
"I would be surprised if we had fewer workers next year than now. That would be a major development," Levanon said. "Not only has head count never gone down in this expansion, I don't think it has ever gone down in any expansion. In almost every case it has to be a recession for the annual count of jobs to go down. The general trend is up; there is just more work to be done in almost every company."
The work to be done may partly be a result of slower global growth and profits being more squeezed at major corporations.
While the stock market continues to set new records, and companies in the S&P 500 are producing greater sales per share, earnings expectations are coming down. Levanon said corporate profits have been under more pressure, which can be seen in national data, including the Bureau of Economic Analysis gross output for industries, which measures sales and has seen slowing growth since a spike in late 2017 and 2018.
"If you look at corporate profits numbers and operating profits — revenue minus expenses — there is reason enough right there. Revenue has slowed down compared to last year, and labor costs are accelerating. That's enough to squeeze profits, and that will continue for years," he said. "It could be the answer from CFOs that many expect cuts in head count reflect the need to cut labor costs in order to boost profits," he added.
The 2017 tax cuts, which boosted the economy and fiscal spending in 2018, are not the kind of quick boosts to expect again.
"The new normal in the U.S. economy is 2% growth, so 2018 was an outlier," Levanon said. "This modest environment of 2% economic growth means modest revenue growth, but at same time, labor costs will continue to accelerate. And more people quit jobs, and that also hurts the bottom line."
A tight labor market and competition for skilled workers is making employee retention more difficult. Companies may be expecting to lose more workers to competitors and not be able to hire fast enough to keep the overall head count number higher.
Jack McCullough, head of the CFO Leadership Council, said that anecdotally the CNBC survey results do match what he is hearing from several finance chiefs. One CFO of a roughly 1,200-employee company told the leadership consultant that the plan was to grow head count by 250 this year, but it is likely to actually shrink by about 50.
"Why? Could not hire in this market. ... They offered a competitive salary, solid benefits package and a stable work environment … but that is a package that was more attractive a decade ago than it is today," McCullough said. "Aggressive hiring plans resulted in reduced head count."
He said CFOs are likely looking at the hiring and retention challenges of 2019 and are now questioning if they will be successful growing their team in 2020. "They probably would like to see head count increase and are working hard to achieve that but are not optimistic that they will be able to," McCullough said.
One way to deal with a tight labor market is to eliminate jobs through automation. Levanon said as it gets harder to recruit new employees, some companies are taking more steps in the direction of automation. That could help explain another Q4 CFO Council survey finding: A significant percentage of big companies are planning to spend, even if they are not hiring — 40% of CFOs said they would increase capital spending over the next 12 months, while only 25% said they would decrease capex.
"Some of that capital spending could be for the purpose of automating some jobs," Levanon said. "There was less pressure to automate in recent years, because profits were high and labor was cheap, and now that is changing."
Automation is expected to hit white-collar jobs more frequently, such as the routine clerical jobs and administrative functions in professional settings.
Zhao said that as the labor market tightens and companies find it harder and more expensive to source talent, they are more inclined to experiment with automation — both to to make existing workers more productive and reduce new hiring, at least in the short term.
He said pointing to automation right now as a primary factor in reduced head count expectations is difficult to do with conviction, because there is not enough data to show its influence over the short-term labor market trends. For example, an aging work population and more people retiring — who then cannot be replaced easily because of the tight labor market — could be as likely a factor for the expected head count reduction.
But all of the factors at play in the market do imply that "hiring is going to be more difficult in 2020 than it is now," Zhao said.
"For a long time we have been hearing how technology is going to replace employees, but it has not really happened in total," CFO Leadership Council's McCullough said. "But as more and more companies automate more and more tasks, we may finally be entering the time where technological advancements legitimately result in fewer jobs. I'm not saying that we will all be replaced by robots in the next three years, but perhaps this is starting in earnest," he said.
The percentage of large corporations planning to increase head count remains significant — 30% said they forecast higher head count next year, according to the Q4 CNBC Global CFO Council survey. Another 10% of CFOs said they expect head count to remain at the same level.
The view from the corporate suite is not a reason for job seekers to stop their search, and that is a particularly important message now since January tends to be the month of the year when the most new job applications are started — a 22% increase over the typical month — according to Glassdoor.
"In short term, this negative sentiment is disappointing for job seekers," Zhao said. "If employers entering a new year are more hesitant to hire, there will be disconnect, but the labor market is still very tight and there are still opportunities available to workers. There is no sign that job seekers should hunker down and give up on job searches," Zhao said.
He added, "As the labor market slows, it will be a little tougher for job seekers to find the right job for them. ... It does also increase the importance of doing research on employers and industries that are doing well."
Wage growth, while underperforming what many experts expected given the strength of the labor market, at a little over 3%, remains strongest for new job openings. New hires are seeing what Levanon described as "rapid wage growth" because companies need to pay more to recruit people — it's the awarding of regular raises to existing workers that is much more modest, and well below pre-recession rates.
Levanon said the overall wage-growth number also is pressured by the white-collar, management jobs, which comprise close to 40% of employment and where the market is not nearly as tight. "Where you do see a tight labor market is blue-collar and manual services, and there you do see wage growth well above pre-recession rates," he said. "High earners push down overall wage growth."
"We would hope to see wage growth pick up," Zhao said. "There are still workers on the sidelines, whether not in the labor force or looking for full-time work."
He described corporate profits as "still fairly healthy" though he added that the slowdown in global demand is "something every employer is thinking about right now, even if there is no recession in 2020."
The largest group of U.S.-based CFOs (40%) cited consumer demand as the No. 1 external risk factor their businesses face right now in the Q4 CNBC CFO survey. "There is a risk that larger employers, especially large ones with global operations and workforces, might be more hesitant," Zhao said.
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said consumers have picked up the slack for limited corporate spending, and Q3 2019 and Q4 2019 sales growth from the S&P 500 universe appears to be similar, although initial signs are that Q4 2019 corporate expenditures are up. "The bottom-line is we keep spending with low interest rates helping, but the lack of corporate spending growth, at a time when cash is plentiful (and not earning much), is concerning for forward growth," he said.
But the current unemployment rate, and labor market more broadly, is not signaling a risk of recession. Economic expansions don't die of old age, but it could be that the closer corporate executives think we are to the end of a cycle, the more uncertain they become as employers — and that is not even taking into account the trade war uncertainty and 2020 being an election year.
McCullough said uncertainty is "far, far worse" from a CFO's perspective than outright pessimism.
"Just not knowing makes it harder for them to commit," Zhao said. "The ball is in the employer's court now. If we see employer demand stay strong in 2020, we will see wage growth accelerate again."
The CNBC Global CFO Council Q4 survey was conducted from Nov. 20–Dec. 3, 2019, among 55 of the 135 global members.