Iowa could see unemployment rise from Fed's inflation-fighting

DES MOINES — Iowa’s unemployment rate may rise through 2023, though it’s unclear by how much, as the Federal Reserve attempts to cool the economy and pull the brakes on record-high inflation.

Iowa's unemployment rate sits at 2.6 percent, about the rate it was before the pandemic. Most businesses are having difficulty finding workers to fill open positions, said Joe Murphy executive director of the Iowa Business Council, which represents some of the state’s largest employers.

Iowa has about 84,000 open jobs and about 44,700 people unemployed, according to Iowa Workforce Development. Murphy said businesses are trying to recruit workers outside Iowa and hoping some people who left the workforce in recent years return.

But the labor market in Iowa could change, as the Fed predicts the national unemployment rate will rise from 3.7 to 4.4 percent by the end of next year, a consequence of its aggressive interest rate increases to try to curb inflation.

In August, Iowa’s unemployment rate slightly ticked up as an additional 1,300 Iowans left the workforce — the biggest reason was to attend school, according to Iowa Workforce Development.

The Fed raised the target federal funds interest rate by another 0.75 percentage points in September, and rates are expected to rise more throughout the year. The benchmark rate affects interest rates on credit cards and other types of loans. Though the Fed does not set mortgage rates, its actions can influence them.

Higher interest rates increase the cost of doing business, which leads to a slowdown in all aspects of business, including hiring, and sometimes leading to layoffs. That’s part of the Fed’s goal: In remarks last month, Fed Chair Jerome Powell said the rate increase will lead to a “softening of the labor market” that is intended to bring demand in line with supply, putting a damper on inflation.

John Winters, an economist at Iowa State University, said the extent to which unemployment increases depends on the severity of the Fed’s interest rate increases.

“If it’s hard to reduce inflation and they keep having to raise more and more, more than they currently expect, then that will lead to more job losses, potentially, than they expect,” he said.

Iowa bucks national trends

Murphy said Iowa will probably see “a little bit of an uptick” in unemployment, but the state and businesses are well situated to withstand the worst effects of a potential recession.

“We think we can be hopefully insulated enough from some of those (national) and even international events that are causing economic headwinds to blow our way,” he said. “We’ll certainly be impacted, but to what level, I think, is the ultimate question.”

Murphy and other experts pointed to Iowa’s resilience during other national recessions, including the 2008-2009 Great Recession. During that time, the national unemployment rate peaked at 10 percent in October 2009. Iowa’s rate stayed below national rates over those two years and peaked at 6.6 percent between May and August 2009.

Iowa’s unemployment rate reached 10.5 percent in April 2020, the worst month of the early pandemic-fueled layoffs, while the national rate shot up to 14.7 percent.

“Coming out of the financial crises in 2008-2009, Iowa had an unemployment rate lower than 40 other states and well below the national level,” Iowa Association of Businesses Vice President for Public Policy JD Davis said in an email. “This is due in part to the efforts of policymakers in Iowa to diversify our economy and insulate Iowans from economic downturns.”

Lending industries hit first

Jeff Eckhoff, a spokesman for Iowa Workforce Development, said in an email the department is paying close attention to interest rates’ effect on employment, especially in industries that lend or depend on lending. Winters said banking, real estate and construction will be potential areas of contraction.

The credit industry already has been impacted as demand decreases or companies expect demand to decrease, Eckhoff said.

Mortgages are one area where rate increases are being felt starkly: As interest rates on mortgages reach a 30-year high, demand nationally dropped 29 percent since last year, according to CNBC.

“There’s less mortgage loans, but also other loans,” Winters said. “Think about businesses. Some businesses if they can borrow at 3.5 percent maybe they do it, if they’ve got to borrow at 6.5 percent maybe they don’t.”

Wells Fargo has cut nearly 400 jobs since the beginning of this year, with many in the home lending sector, according to reports. The financial services company — the largest employer in Central Iowa — said in a statement to KCCI-TV earlier this year the layoffs in its home mortgage sector were the result of natural changes to the home lending environment.

“We regularly review and adjust staffing levels to align with market conditions and the needs of our businesses,” Wells Fargo spokesman Mike Slusark said in a statement. “We work hard to identify opportunities for employees in other parts of the company so we can retain as many employees as possible.”

Reemployment process

Under a new Iowa law passed this year by the Republican-led Legislature, Iowans who are eligible for unemployment benefits can receive them only for 16 weeks, down from the previous 26 weeks.

Gov. Kim Reynolds said the change would help bolster Iowa’s workforce and fill the thousands of open jobs. Democrats said the law was bad for workers and will hurt unemployed Iowans.

Iowa Workforce Development ramped up its efforts to match unemployed Iowans with open jobs this year, Eckhoff said, through its Reemployment Case Management system. The agency reaches out to new jobless claimants within the first week and requires meetings with career advisers. The agency also connects Iowans with apprenticeship and training programs and apprenticeships.

For employers, Iowa Workforce Development offers a program that allows employers to spread hour reduction among multiple employees, and the employees can use unemployment insurance to make up some of those lost wages.

As Iowa businesses and workers look to the future, the prevailing theme is uncertainty about the economy and labor market. Charlie Wishman, president of the Iowa Federation of Labor, said the economic trends of the last two years have not been in line with expectations.

“I think if anything we have learned in the last two years, and especially when it comes to things like the economy, the supply chains, you can go on and on, is to expect the unexpected,” he said. “It’s really difficult to predict what’s going to happen on unemployment, on wages, on a whole host of things.”

Comments: Caleb McCullough cmccullough@qctimes.com