ARG Quarterly Barometer May 2023

RESOURCE GROUP

Quarterly Barometer Q2 2023

Welcome to our first ARG Quarterly Barometer. We created the Barometer in response to the voluminous conversations taking place related to labor and the job market. These have increased steadily over the last three years, through the pandemic, the Great Resignation, the Great Regret to today and a seemingly never-ending hot talent market. I’ve been in the recruiting industry for almost a quarter century, and even I have never spent more time pondering and pontificating the changes in the industry, employee and employer expectations, and how work gets done. Also, I’ve never seen conversations about productivity, engagement, retention, wages vs. inflation, and other related topics happening among the “civilians” out there. Yes, these were all things we talked about “in the industry” and in the human resource world, but now I’m hearing these discussions taking place away from the workplace among the population at large. I thought it was time to cut through the noise, curate the most important and trusted data, and package it in an easy-to-digest format that we can send to our clients, our candidates and our followers.

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So, here it is. It’s important to note: We are not economists, hedge fund managers, or fortune tellers. For the purposes of this document, we don’t delve into one-off shocks to the system such as a resurgent pandemic, the volatile political environment, whether the debt limit gets raised, the war in Europe, or worry about potential conflict with China over Taiwan. The commentary in the Barometer is presented as our opinions and is meant to add to the conversation. Don’t go betting the market on this, please! We have aggregated data from numerous reputable sources and presented them together here. We wanted to put all the relevant data and statistics together in one spot so that we can really look at the factors that are affecting the job market as a whole, and more specifically, the Southern California finance and accounting sector. Yes, we will discuss what we are personally seeing in the market and will share some interesting tidbits on the data or interpretations along the way. I would also love to hear your take on the current labor and job landscape. This is an ongoing conversation, so feel free to email me your thoughts.

I want to stress that an accurate view of the labor market is crucial for decision-making at all levels of an organization.

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There is so much conversation out there — much of which is easy to misinterpret. It’s imperative that you have accurate information to make smart hiring and compensation decisions, plan any workforce reductions, and develop effective retention strategies. Without the right data, you can’t do any of those things with confidence. I also want to stress that the data points related to unemployment, labor participation, and other charts in the Quarterly Barometer cover all types of jobs. Within the accounting and finance sector, the market is even tighter. And that is not going away anytime soon. As we highlighted in January , the professional accounting and finance talent pool is shrinking rapidly due to multiple factors including a significant decline in students who are pursuing degrees in accounting. Those of us in accounting and finance know the sad truth: Even in the best of times companies' accounting and finance teams are rarely overstaffed. So, when we look at recent headlines about layoffs and restructures, it’s generally not impacting the accounting and finance departments in a material way. Our most critical issue is more one of supply and demand, which may not track with overall labor trends. In this Barometer, you’ll find a snapshot of what happened in Q1 from a data-driven perspective with some additional commentary. We’ll also include a look ahead at what we think are the most important considerations for Southern California leaders for the rest of 2023. I hope you find it informative, actionable, and relevant to the decisions you are making.

Jennifer Hannigan Founder and CEO Alliance Resource Group

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Key Findings Media and economists can talk about a slowing economy, but employment and the job market need to be evaluated on their own terms. • As much as the Fed is working to curb inflation (see chart on page 15), the job market remains very strong. • Although people are coming back into the labor market (see charts on page 13), we are still below pre-pandemic levels. There are simply more jobs than qualified people. • We have a major supply and demand problem in the accounting and finance sector here in SoCal. • Retention should be your top priority. Make sure you are addressing compensation, benefits and culture now before your best team members exit. • Wage growth is slowing (see chart on page 14), and we don’t expect pay to dramatically increase this year. • Layoffs will continue but — at least in the near future — will be more of a rebalancing of the job market than an indicator of major unemployment movement.

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ARG Insights Unemployment

As of March 2023, the national unemployment rate was 3.5% – a record low by any standards. Los Angeles came in at 5.3% and Or - ange County at a rock-bottom 3.4% (see charts on page 11). Even a year after the Fed has been aggressively raising rates to tame inflation, the job market remains incredibly hot. As mentioned earlier, the accounting and finance sectors are even tighter. We have seen the talent supply in Southern California dwindle for various reasons, including people leaving the industry in pursuit of other careers, out-of-state relocations, and fewer college graduates entering the field. The demand for accounting and finance professionals continues to outpace the supply. Job Openings and Labor Force Participation This is where the rubber hits the road: Per CNN.com, over the past 12 months, the labor market has seen a net gain of more than 4.1 million jobs, averaging 345,417 jobs gained per month, helping drop the unemployment rate to decades-low levels all while we are al- most back to pre-pandemic labor force participation rates (see chart on page 13). Although March missed the estimate for job creation and came in at 236,000 (still a historically strong gain but the smallest in more than two years), the overall quarter was very strong. However, the job market remains above pre-pandemic norms. To put this in perspective: Between 2010 and 2019, the economy added an average of 183,000 jobs per month.

So, the job market may have slowed a bit, but it’s still incredibly strong, far outpacing anything we’ve seen in recent history.

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Workers are now returning to the labor market. In February, the labor force participation rate for workers between age 25 and 54 hit 83.2%, surpassing pre-pandemic levels. And last month, the overall labor force participation rate continued its upward march, increasing to 62.6% and nearing a pre-pandemic era high — still slightly below the February 2020 rate of 63.3%. With national unemployment at 3.5% and a total Civilian Labor Force of 166 million workers (see chart on page 13), you might logically infer that 5.8 million workers are looking for work or are in transition. But according to the U.S. Bureau of Labor Statistics, there are an estimated 10 million job openings (see chart on page 12). Quite simply: There aren’t enough workers to fill the number of open jobs in the United States. And we know the gap is even wider for professional level roles and roles that require a specific knowledge set or skill. Inflation Rate and Growth of Wages This is another subject that has received a lot of press and is often miscommunicated. Yes, wages have increased over the last two years. In the accounting and finance sector, we have seen this more in the lower- to middle-level positions with slight gains in the director- and executive-level roles. Understandably, it’s been challenging for companies and hiring managers to wrap their heads around the increase in compensation costs associated with talent and labor. But as the chart on page 14 shows, wage increases are just now catching up with inflation, and we spent much of 2021 and 2022 with a significant gap. Real wages are important to workers, and employ - ers need to keep this in mind when hiring and when evaluating current employee compensation levels for retention purposes.

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Talk of Recession The threat of a recession has received a lot of attention lately (too much attention, in my opinion). It is true that the yield curve is inverted (see chart on page 15), which is a leading predictor of recession in the coming 12 months. And, yes, there have been some layoffs. But as I mentioned in my opening comments, accounting and finance departments rarely find themselves overstaffed and they are rarely among the first departments to be hit with layoffs. This combined with the obvious supply and demand challenge for pro- fessional talent gives me comfort that the accounting and finance tal - ent market will drive right through any mild recession that may come.

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What Does This Mean for SoCal Leaders? Adjust Current Compensation Levels Compensation and inflation have both increased over the last few years. If you have superstars who have been with you for more than three years and you have not adjusted their compensation, you need to do that immediately. The job market is hot, and you should expect that your employees are being contacted by recruiters, your competitors, and other companies hungry for top talent. It is much less expensive to adjust a superstar employee’s pay, than to see them walk out, leaving you to hire a recruiter to find a replacement – most likely at a higher compensation level than the person who left. Retention Needs to Be a Top Priority As this year unfolds, we will likely hear more negative news about interest rates, commercial real estate, consumer confidence, inflation, volatility of the stock market, etc. This is the most important time to be hyper communicative with your employees and to up your retention strategies. Keep the team apprised of changes in the organization. Let them know how the company is doing and what plans the company has to weather any potential storm. If employees don’t know what’s going on, it’s human nature to imagine the worst. When things get tough, you need your best talent. Do not ease up on your retention strategies. It’s not the time to take away company lunches, annual parties, or any other perks you offer to keep up company morale. It’s a small price to pay to hang on to your best team members.

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Think Twice Before Making Reductions in Your Accounting and Finance Staff As the economy slows down and potentially moves into a recession, don’t immediately jump into making staffing cuts. The accounting and finance talent supply is especially scarce in Southern California, and that imbalance will take a while to level off. Over the years, we have seen many companies conduct reductions in force as a preemptive solution to potential recessions or slowdowns in their companies only to have to rehire shortly afterward because they miscalculated the workload or company demand did not fall as short as expected. Regardless of the reason, once a layoff happens, culture and morale are affected internally, and there is often external damage to the brand. This could make attracting talent even more difficult going forward. C-suite executives must have the right data and information on the labor market and talent supply before making critical headcount deci- sions. A Great Opportunity to Hire Talent As 2023 continues to unfold, we will continue to see a “rebalancing” of the job market. This is a great time for companies that value talent to begin to hire superstars who might not have been available or who weren't paying attention over the last few years.

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Unemployment Rate in Orange County: Percent, Monthly, Not Seasonally Adjusted

Unemployment Rate in Orange County, CA, Percent, Monthly, Not Seasonally Adjusted

10.0 12.0 14.0 16.0 18.0 18% 16% 14% 12% 10%

0.0 2.0 4.0 6.0 8.0 8% 6% 4% 2% 0%

2020

2019

2021

2022

2023

The Unemployment Rate is the unemployed percent of the civilian labor force. Total Unemployed Persons / Civilian Labor Force Source: U.S. Bureau of Labor Statistics.

Unemployment Rate in Los Angeles County: Percent, Monthly, Not Seasonally Adjusted

Unemployment Rate in Los Angeles County, CA, Percent, Monthly, Not Seasonally Adjusted

20% 18% 16% 14% 12% 10% 10.0 12.0 14.0 16.0 18.0 20.0

8% 6% 4% 2% 0% 0.0 2.0 4.0 6.0 8.0

Q4 Q1

2023

2019

2020

2021

2022

The Unemployment Rate is the unemployed percent of the civilian labor force. Total Unemployed Persons / Civilian Labor Force Source: U.S. Bureau of Labor Statistics.

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20-Year Historical National Unemployment

20%

15%

10%

The Unemployment Rate is the unemployed percent of the civilian labor force. Total Unemployed Persons / Civilian Labor Force Source: U.S. Bureau of Labor Statistics.

Job Openings: All Classes

Job Openings All Classes

10000 12000 14000 14M 12M 10M

0 2000 4000 6000 8000 8M 6M 4M 2M 0

2019

2020

2021

2022

2023

Job Openings are national and are calculated by the U.S. Bureau of Labor Statistics. Source: U.S. Bureau of Labor Statistics.

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Civilian Labor Force Participation Rate for California: Percent, Monthly, Seasonally Adjusted Labor Force Participation Rate for California, Percent, Monthly, Seasonally Adjusted

64% 63% 62% 61% 60% 59% 58% 57% 57.0 58.0 59.0 60.0 61.0 62.0 63.0 64.0

2019

2020

2021

2022

2023

The Civilian Labor Force refers to employed or unemployed individuals aged 16 and older, who are not active-duty military personnel, institutionalized individuals, agricultural workers, and federal government employees. Retirees, handicapped and discouraged workers are also not part of the civilian labor force. Source: U.S. Bureau of Labor Statistics.

National Civilian Labor Force Level: Monthly Seasonally Adjusted CLF16OV Civilian Labor Force Level, Thousands of Persons, Monthly, Seasonally Adjusted

168M 166M 164M 162M 160M 158M 156M 154M 152M 150M 150000 152000 154000 156000 158000 160000 162000 164000 166000 168000

Q4 Q1

2019

2020

2021

2022

2023

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Difference Between the Inflation Rate and Growth of Wages in the United States from 2019 to 2023

Difference between the inflation rate and growth of wages in the United States from 2020 to 2023

10% 9% 8% 7% 6% 5% 4% 3% 2% 1% 0%

6.10% 6.40%

Wages Inflation

Series1

Series2

2019

2020

2021

2022

2023

Comparison between the trailing 12-month average Inflation Rate and the corresponding Growth of Wages. Source: U.S. Bureau of Labor Statistics.

20,500 20,000 19,500 19,000 18,500 18,000 17,500 17,000 16,500 16,000 15,000 Real Gross Domestic Product 15.5 16 16.5 17 17.5 18 18.5 19 19.5 20 20.5

Real Gross Domestic Product

2019

2020

2021

2022

2023

Real Gross Domestic Product is the inflation adjusted value of the goods and services produced by labor and property located in the United States U.S. Bureau of Economic Analysis Units: Billions of Chained 2012 Dollars, Seasonally Adjusted Annual Rate

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Federal Funds Effective Rate

Federal Funds Effective Rate 6% 5% 4% 3% 2% 1% 0% Q1 Q2 Q3 Q4 Q1 Q2 Q3 0.00 1.00 2.00 3.00 4.00 5.00 6.00

Q4 Q1

Q1 Q2 Q3

Q4 Q1

2023

2019

2020

2021

2022

Source: Board of Governors of the Federal Reserve System (US)

10-Year Treasury Constant Maturity Minus 3-Month Treasury Yields

10-Year Treasury Constant Maturity Minus 3-Month Treasury Constant Maturity

2.5% 2.0% 1.5% 1.0% .5% 0% -.5% -1.0% -1.5% -2.0%

2.50

2.00

1.50

1.00

0.50

0.00

-0.50

-1.00

-1.50

-2.00

2023

2019

2020

2021

2022

This chart represents the 10-year Treasury yields (interest rates) minus the 3-month Treasury yields. Source: Federal Reserve Bank of St. Louis

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Terms and Definitions Civilian Labor Force The Civilian Labor Force refers to employed or unemployed individuals aged 16 and older, who are not active-duty military personnel, institutionalized individuals, agricultural workers, and federal government employees. Retirees, handicapped and discouraged workers are also not part of the civilian labor force. Employed Persons Employed Persons are all persons who (a) did any work as paid employees, worked in their own business or profession or on their own farm, or worked 15 hours or more as unpaid workers in an enterprise operated by a member of their family, or (b) were not working but who had jobs from which they were temporarily absent because of vacation, illness, bad weather, childcare problems, maternity or paternity leave, labor-management dispute, job training, or other family or personal reasons, whether or not they were paid for the time off or were seeking other jobs. Each employed person is counted only once, even if he or she holds more than one job. Unemployed Persons Unemployed Persons are all persons who had no employment, were available for work, except for temporary illness, and had made specific efforts to find employment sometime during the previous 4-week period. Persons who were waiting to be recalled to a job from which they had been laid off need not have been looking for work to be classified as unemployed. Job Openings Job Openings are defined by the U.S. Bureau of Labor Statistics as all positions that are open on the last business day of the reference month. The job opening must actually exist, must start within 30 days, and the employer is actively recruiting workers from outside the establishment to fill the role.

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Seasonal Adjustment Seasonal Adjustment is a statistical technique that attempts to measure and remove the influences of predictable seasonal patterns to reveal how employment and unemployment changes from month to month. Over the course of a year, the size of the labor force, the levels of employment and unemployment, and other measures of labor market activity undergo fluctuations due to seasonal events including changes in weather, harvests, major holidays, and school schedules. Because these seasonal events follow a more or less regular pattern each year, their influence on statistical trends can be eliminated by seasonally adjusting the statistics from month to month. These seasonal adjustments make it easier to observe the cyclical, underlying trend, and other nonseasonal movements in the series. Civilian Labor Force Participation Rate Civilian Labor Force Participation Rate is an estimate of an economy’s active workforce. The formula is the number of people ages 16 and older who are employed or actively seeking employment, divided by the total non-institutionalized, civilian working-age population. Consumer Price Index (CPI) The Consumer Price Index (CPI) measures the change in prices paid by consumers for goods and services. The CPI reflects spending patterns for each of two population groups: all urban consumers and urban wage earners and clerical workers. The data we generally present is known as CPI-U, the Consumer Price Index for All Urban Consumers. The all urban consumer group represents over 90 percent of the total U.S. population. It is based on the expenditures of almost all residents of urban or metropolitan areas, including professionals, the self-employed, the poor, the unemployed, and retired people, as well as urban wage earners and clerical workers. Not included in the CPI are the spending patterns of people living in rural nonmetropolitan areas, farming families, people in the Armed Forces, and those in institutions, such as prisons and mental hospitals.

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Federal Funds Rate The Federal Funds Rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. When a depository institution has surplus balances in its reserve account, it lends to other banks in need of larger balances. In simpler terms, a bank with excess cash, which is often referred to as liquidity, will lend to another bank that needs to quickly raise liquidity. The rate that the borrowing institution pays to the lending institution is determined between the two banks; the weighted average rate for all of these types of negotiations is called the effective federal funds rate. The effective Federal Funds Rate is essentially determined by the market but is influenced by the Federal Reserve through open market operations to reach the Federal Funds Rate target. Inflation Rate Inflation Rate is calculated as the change in Consumer Price Index over time presented as a percentage change Growth of Wages Growth of W ages is the change in wages represented as a percentage as calculated by the U.S. Bureau of Labor Statistics. Real Gross Domestic Product (GDP) Real Gross Domestic product (GDP) is an inflation-adjusted measure that reflects the value of all goods and services produced by an economy in a given year. Put simply, real GDP measures the total economic output of a country and is adjusted for changes in price. Yield Curve A Yield Curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main shapes of yield curves: normal (upward sloping curves), inverted (downward sloping curves), and flat. While normal curves generally point to economic expansion, downward sloping (inverted) curves often predict economic recession in the coming 12 months.

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What We’re Reading CFO.com: CFO 2023 Outlook: Cautious optimism amid recession, cost cutting, and workforce challenges

Forbes: What CFOs Learned from the SVB Crisis

ITR Economics: Limit Your Exposure to the Upcoming Recession

CFO Dive: Finance leaders tap tech for efficiency boost

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Better teams start with a smarter approach to financial recruiting.

www.allianceresourcegroup.com

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