Plans to Quit Rise But So Do Fears of Layoffs—Thanks to the Fed and AI
Are workers gaining or losing confidence about their job prospects?
On Monday, the Federal Reserve Bank of New York released the results of its monthly consumer expectations survey—and the results provided ammunition to both optimists and pessimists.
The mean probability workers assigned to voluntarily leaving their jobs in the next 12 months jumped 2.6 percentage points to 20.8 percent, the highest reading since February 2023. This is an indication of economic confidence because workers are more likely to expect to leave their jobs—and more likely to actually quit—when they are optimistic about the prospects of finding a better job. The New York Fed said the increase was broad-based across age, education, and income groups.
Yet at the same time, the perceived probability of being let go from work also climbed, increasing by 0.5 percentage point to 15.1 percent. And the perceived ability to find a job within three months after being laid off fell by 2.3 percentage points to 43.7 percent, the lowest reading since December. Those are obviously pessimistic developments.
The New York Fed’s press release emphasized the negative. “Labor market expectations deteriorated somewhat with an increase in layoff expectations and a decline in job finding expectations,” the New York Fed wrote. Most of the financial press followed the bank’s lead, with Bloomberg News reporting: “Americans’ view of the labor market grew somewhat more pessimistic in May.” It’s hard not to escape the impression that there’s a bit of bias at work here. The New York Fed has almost no one who believes in the Trump economic program, so it is predisposed to see developments in the worst light.
Digging into the Divergence Between Quits and Job Loss Fears
While the rise of quitting intentions would seem to contradict the rising fear of being laid off and the rising perception that a replacement job would be difficult to find, these results are not necessarily inconsistent.
The quitting question asks the respondent to introspect. It forces them to think about what choices they expect to make. The cognitive process is: Do I want to leave this job in the next year? That’s grounded in personal experience and plans. It is relatively insulated from the ambient narrative about the economy.
The question about losing your job or finding a replacement job is less personal. It asks workers to read the minds and plans of their current employers and potential future employers. It is probably more influenced by perceptions of the broader economy than the quitting question.
Putting them together indicates that workers are increasingly confident that they will find another job on their own volition and, at the same time, worried that they might get pushed out of their job and have difficulty finding a new one quickly. It’s possible that the latter is contributing to the former. That is, some workers may be thinking they should consider looking for a new job before their current job is cut. They may be planning to quit to find a more secure job.
So What’s Behind the Rising Layoff Fears?
Actual layoffs are quite low right now, except in technology and finance. Jobless claims have been extremely low for several months, often pushing up against historic lows we have rarely seen. The unemployment rate has been hovering around 4.3 percent, a very low rate by historical standards, for months. Yet technology in particular is seeing an unusually high level of job losses for the sector—although not unusually high for other parts of the economy. For workers in technology, it probably feels like the economy is in a rough place even though the broader labor market has been booming for three months.
It’s likely that artificial intelligence is contributing to the rising fear of losing a job. Day in and day out, workers are told that AI is going to take their jobs. The AI displacement story is one of the dominant narratives of our time—it’s bound to weigh on worker expectations.
Workers may also be reacting to the recent climb in inflation and the Fed’s likely reaction. The market is now pricing in no Fed cuts this year and perhaps none for the first half of next year. The Fed is expected to remove the so-called “easing bias” from its monetary policy statement when it meets later this month. Longer-term bond yields have been climbing, an indication that short-term rates are not expected to come down as much as thought.
A tighter Fed policy raises the risk of job cuts and a slowdown in hiring. So if workers are picking up on the vibe that the Fed’s monetary policy is likely to be tighter than previously expected, it’s rational to raise expectations of job loss.
Supporting the idea that Fed policy may be an important factor here comes from the survey’s questions about credit availability. Perceptions of credit access compared to a year ago remained largely unchanged. But expectations for future credit availability declined, with a lower share of respondents expecting it will be easier to obtain credit in the year ahead. That’s exactly what a tighter Fed policy means.
Although the New York Fed calls the credit availability response a “deterioration,” it is really just an acknowledgment of what the Fed has been communicating. Greater access to credit is not necessarily an improvement—and in fact it often occurs when the Fed is attempting to juice the economy to prevent or alleviate a downturn. If the Fed thinks the economy will not need expanded credit to support its goal of a healthy labor market, agreeing with the Fed on this is not necessarily pessimistic.
And that seems to be what people expect. The perceived probability that the U.S. unemployment rate will be higher one year from now decreased by 0.4 percentage point to 43.2 percent. So households are more likely to think credit will be less available and less likely to think that unemployment is going to go up.
The responses on inflation also support this Fed-centric interpretation. The median inflation expectations decreased by 0.1 percentage point to 3.5 percent at the one-year-ahead horizon. And note that this is lower than the most recent rates for the consumer price index or the personal consumption expenditures price index, both of which saw prices rising 3.8 percent. So households expect inflation to fall over the next year. And the same is true in the three and five-year windows, where inflation is expected to come in at 3.1 percent and 3.0 percent on average.
That three-year expectation is above the Fed’s two percent target but don’t read much into that. At 3.1 percent, it is not really elevated by historical standards. The average three-year expectation going back to 2013 is around three percent and the pre-pandemic, pre-Bidenflation average was around 2.9 percent.
The best reading of the data is not that consumers think the labor market or the broader economy is deteriorating. Instead, it’s that they think jobs are more at risk because of AI and a Fed less worried about the labor market and therefore more focused on inflation. Coupled with the jump in intentions to quit, that strikes us a view of the economy developing in a positive direction.
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