In a positive development for the U.S. economy, the latest key jobs data indicates that the nation’s employment situation is gradually approaching pre-pandemic levels. This trend holds promise for the Federal Reserve’s efforts to curtail inflation without causing a drastic spike in the unemployment rate.
The Job Openings and Labor Turnover Survey (JOLTS) from the Labor Department showcased significant shifts in labor dynamics. Specifically, the report revealed that the rate at which nonfarm payroll workers voluntarily quit their jobs in July was 2.3%, a drop from the peak of 3% witnessed during the height of the pandemic-induced “Great Resignation.” This marked decrease signals a return to stability and was the lowest rate recorded since January 2021, a time when a surge in resignations was underway. This situation bears resemblance to the labor market conditions observed in 2018 and 2019, characterized by both a competitive job landscape and minimal inflation.
Of noteworthy concern was the decline in the hiring rate, hitting its lowest point since April 2020. This paired with the decrease in voluntary resignations points toward diminishing labor demand and more relaxed hiring conditions. Such a scenario aligns with the Federal Reserve’s intention to alleviate inflationary pressures and reduce the urgency for wage hikes.
The pivotal aspect is that this adjustment in labor dynamics should ideally occur without the jarring increase in unemployment that has historically accompanied the Federal Reserve’s attempts to rein in inflation via interest rate hikes, which tend to slow down economic activity.
The promising data extended to the “Beveridge Curve,” a metric tracking the correlation between job openings and unemployment rates. The curve’s gradual descent toward 2019 levels, coupled with low unemployment and inflation within the Federal Reserve’s target of 2%, signifies a positive alignment.
Industry experts and analysts weighed in on these developments. Fiona Greig, a prominent figure at Vanguard, a leading investment fund manager, interpreted the JOLTS data for July as indicative of the labor market’s softening. This trend is not confined to sectors with high employee turnover, like leisure and hospitality, but also extends to more stable positions in various industries. Greig’s insights were fortified by analysis from Vanguard’s extensive repository of 401(k) retirement plan data, reflecting a broader trend.
This trend holds significance because the 401(k) data predominantly captures higher-paying jobs. Slower hiring in this category could significantly influence the Federal Reserve’s stance on inflation. Many policymakers believe that lower-income consumers are already scaling back on spending, while those with higher earnings sustain overall consumption.
Additional data from the Conference Board revealed a decline in consumer confidence, suggesting a potential reduction in spending. In response, traders in contracts tied to the Federal Reserve’s policy rate began betting on the central bank’s decision to maintain steady rates. The expected range for the policy rate is 5.25%-5.50% during the upcoming September meeting.
The upcoming release of economic projections will provide insights into the Federal Reserve’s outlook on interest rates. This projection will be shaped by incoming data, including updated information on inflation, hiring, and wages for August.
While a robust job market and strong wage growth have fueled arguments against an economic slowdown, economists remain divided on the extent to which rising unemployment is necessary to create the required economic “slack” for lowering inflation. Some, like Fed Governor Christopher Waller, suggest that a return of the Beveridge Curve to pre-pandemic levels could naturally achieve this balance between labor supply and demand.
The ratio of job openings to unemployed individuals, a metric closely monitored by the Federal Reserve, remains at around 1.5 jobs per unemployed person. While this is above 2019 levels, it’s the lowest since September 2021 and down from the peak of 2-to-1 in March 2022, when the Federal Reserve began raising interest rates.
Oren Klachkin, a financial market economist at Nationwide, interprets the data as granting the Federal Reserve “breathing room.” However, a significant shift in the central bank’s stance on high-interest rates is unlikely until there’s clear evidence of inflation consistently trending toward the 2% target.
With underlying inflation, excluding volatile food and energy costs, still double the Federal Reserve’s target, close attention will be on the forthcoming July data release, due on Thursday. These numbers will provide further insights into the economy’s trajectory and the efficacy of the Federal Reserve’s strategies.