Layoffs could be coming as debt-laden firms navigate the pain of higher rates, economists say

• The economy could be primed for a surge in layoffs by the end of 2024, economic experts say.
• That's because aggressive Fed rate hikes haven't been fully felt across the economy.

A wave of layoffs could be coming as companies deal with the reality of higher interest rates, economists say.

While the job market still looks strong on paper, hiring conditions are set for a slowdown later this year, according to David Rosenberg, economist and the founder of Rosenberg Research. That's because the economy — and what's been touted as a surprisingly strong job market — are actually weaker than they appear, he told Business Insider, predicting that unemployment could jump to 5% by the end of the year.

Steve Briggs, the CEO of Briggs Financial, is also calling for dismal job losses to begin next year. In the worst-case scenario, unemployment could soar up to 10%-15% in 2025 and into 2026, Briggs predicted, though that view is very much an outlier among other Wall Street forecasters, and would be generally unprecedented outside of a major recession. The peak unemployment rate during the Great Recession was 10% in 2009.

Behind the dire predictions for the US labor market is the Fed's aggressive monetary policy tightening to control inflation, Briggs said, referring to the current economic environment as the "tip of the iceberg."

"Right now it's still pretty unpredictable," Briggs said in an interview. "But boy, there's more than enough smoke here to warrant making sure we are in a very defensive position."

Signs of weakness have been flashing in several under-the-radar indicators. While the economy added 275,000 jobs in February, which was more than expected, continuing unemployment claims have ticked higher for most of the last year, suggesting that it's becoming harder for out-of-work Americans to land a new gig.

Following revisions to the prior two months' figures, the unemployment rate also rose to 3.9% in February, its highest level in two years.

Most of the jobs being created in the economy are also part-time gigs, Rosenberg said, which explains why the number of full-time workers declined in February compared to last year, and why the average weekly hours among employees has dropped to just around 34 hours, according to the Bureau of Labor Statistics. That's a level that typically puts pressure on employers to start cutting their staff, Rosenberg added.

"We have not created one net new full-time job," Rosenberg said. "I have a tough time grappling with the overwhelming consensus view that we have some sort of terrific labor market when all we've accomplished is [turning] this thing into a part-time economy."

Debt deluge

The shaky labor outlook is largely the fault of the Fed's aggressive interest-rate hikes in 2022 and 2023, with higher borrowing costs posing a big risk for the economy and debt-straddled firms over the coming year.

Central bankers raised interest rates to their highest levels since 2001 in order to tame inflation. Prices have cooled significantly, but high rates are still threatening to tip the economy into a recession.

While the US is not in a recession and growth remains strong, the full impact of Fed rate hikes likely hasn't been fully felt in the economy, economic experts have said.

Higher rates spell trouble for US companies with near-term debt maturities. Non-financial corporations had a near-record $13.6 trillion debt outstanding in the last quarter of 2023, according to Fed data. Heavily indebted businesses risk defaulting as debt matures and has to be refinanced at higher interest rates. That could result in a wave of bankruptcies and restructurings starting in the second half 2024, Briggs predicted.

Even for firms that can navigate the difficulties of higher rates, steeper borrowing costs are a strain on balance sheets, which could prompt business leaders to reorganize their workforces, Briggs and Rosenberg said.

"You're shielded to some extent from the damage the Fed has done, but that just buys you time. It doesn't get you a get out of jail free card," Rosenberg said.

Layoffs and debt defaults have been on rise. The default rate for leveraged loans rose to 3.3% in the 12 months leading up to January, and is expected to climb to around 4% this year, according to Fitch Ratings.

Meanwhile, layoff announcements surged 410% year-over-year in February — the worst February recorded since 2009, according to an analysis from Challenger, Gray & Christmas. 60% of states have already seen unemployment levels climb to recessionary levels, Rosenberg noted.

For individual Americans, layoffs are always difficult, but they could be especially so in the coming months. Many people have exhausted their excess savings from the pandemic, Rosenberg said, which has been touted as a possible reason credit card debt has blown past $1 trillion.

"I think the recession narrative is going to come back in full view," Rosenberg said. "The economy will be a sacrificial lamb as the Fed attempts to gain more and more confidence that inflation heading toward target ... The unemployment rate is a classic lagging indicator."