All these charts on the US job market are telling the Fed to cut rates
It’s not a bad time to be an American worker, by most metrics.
In deciding whether, when, and how much to cut rates, the Federal Reserve must judge whether the potential for inflation to re-accelerate is more likely, or would be more painful, than the risk of the labor market taking a nosedive.
Well, one thing that should be plainly clear based on data received this week is that the job market is cooling.
It’s not a bad time to be an American worker, judging by most of the metrics we use to measure the strength of the labor market through history. But it's simply getting less good. There's little threat of an inflationary spiral tied to too many workers making too much money buying too many things.
“With inflation trending down and labor markets showing slower growth and easing in level terms, there is little reason for the Fed not to begin an easing cycle in September,” writes Peter Williams, economist at 22V Research.
The ratio of job vacancies to the number of unemployed Americans is now below where it was in February 2020, just before mobility restrictions to limit the coronavirus’ spread became commonplace.
I’d take this metric with a heap of salt: for one, the longer an expansion goes, the more likely it is for job growth to come from people who weren't even looking for a job the previous month, rather than among the ranks of the unemployed. So empirically, the denominator isn’t a great measure of would-be potential workers. And job openings are not a top-tier gauge of how tight the labor market is because there’s not necessarily any kind of labor market change associated with adding a job posting. It’s like a costless call option an employer can use to try to find, or upgrade, their talent. Every business cycle, the ratio of job openings to unemployed makes higher highs. That suggests that either the labor market is getting structurally tighter, or businesses are simply posting more job openings than they actually need as time goes on.
Quitting your job, however, certainly speaks volumes. It’s generally something you only do when you a) have another opportunity lined up and b) that job pays better. Hiring, obviously, is another action that has an immediate imprint on the job market.
The private sector quits rate is 2.3%, well below its pre-pandemic level; the private sector hiring rate is closer to its 2020 trough than its February 2020 reading. This remains a very low-churn labor market, with the firing rate also extremely low. But the risk is that if economic growth decelerates further (which would seem to be more likely than not in the absence of rate cuts), the layoffs and discharge rate is more likely to go up than the hiring rate.
The quits rate tends to be a good leading or coincident indicator for wage growth. On Wednesday morning, the Employment Cost Index, considered by the US central bank to be the best quality gauge of wage pressures, showed the annual growth in private wages and salaries (excluding incentive-paid occupations) dipped to 4.1% in the second quarter, its slowest increase since 2021.
One reason wage growth is elevated relative to pre-pandemic includes catch-up pay increases among unionized workers, per Cornell University assistant professor Justin Bloesch, something that happens with a lag versus changes in market compensation.
“Given the decline in quits, I suspect there is more room for compensation costs to slow in the quarters ahead,” writes Neil Dutta, head of US economics at Renaissance Macro Research. “The right tail for inflation has been clipped for the time being and the risks for both growth and inflation are skewed to the downside.”
And while perception may not always be reality, Americans’ attitudes on the state of the labor market have been deteriorating. The Conference Board’s “labor differential” shows the gap between the percent of those surveyed who say jobs are plentiful and those who think they’re hard to get. This metric, which often moves in the opposite direction as the unemployment rate, continues to sink lower.
