Labor Market Stays on the Right Path

Article originally posted on CoStar on August 9, 2023

The path toward moderation is becoming clearer as firms become more cautious in hiring.

The latest jobs report demonstrated that firms added 187,000 positions in July. After June and May job gains were revised lower by 24,000 positions and 25,000 positions, respectively, job gains have averaged 217,000 positions during the past three months. As noted last month, payroll revisions have been coming in consistently lower this year, suggesting that initial figures have been too optimistic. Nevertheless, payrolls are painting the Goldilocks scenario, where the Federal Reserve is orchestrating a soft landing for the economy, one that might even avoid the recession many economists feared earlier.

The unemployment rate ticked lower to 3.5%, still near a 50-year low, and the labor force participation rate remained the same for the fifth consecutive month at 62.6%.

Labor force participation continues to be bolstered by prime-aged workers who are overwhelmingly compensating for retirees leaving the workforce. In particular, the participation rate for women aged 16 years and older ticked higher and is now at its highest rate since the pandemic struck.

While job growth is still faster than pre-pandemic rates, hiring in cyclical sectors has been slowing dramatically, including in service-oriented sectors that saw a boom once the economy reopened.

Of the 187,000 positions added in July, 100,000 positions, or more than half, were in private education and health services, while another 15,000 positions were government jobs. These sectors struggled to hire during the pandemic because they could not compete with businesses that were offering better pay or hybrid work.

In a separate survey, the Labor Department reported that job openings were little changed on the last day of June from the previous month, at 9.6 million. Compared to a year ago, however, job openings are down by 12.6%. Of course, it’s far easier to take down a job listing than it is to actually lay a worker off, and a company’s first sign of slowing hiring would be to remove job ads.

Historically, however, sharp declines in job openings tend to be followed by job losses during the subsequent months, suggesting that job losses could be coming in those sectors that are seeing the largest pullback in openings, such as manufacturing and financial activities.

In contrast, education and governments continue to seek workers, having not recovered to pre-pandemic staffing levels. Interestingly, the accommodation and food services sector is also pulling back on job listings despite its shortage of workers, a sign that efficiencies in operations are taking place. Professional and business services, on the other hand, added more than 1.2 million workers since the onset of the pandemic. That is apparently more than enough, as they are now taking job ads down.

Last month, we introduced the Beveridge Curve, which shows the relationship between the job openings rate, or what share of the staffing levels firms desire remains unfilled, and the unemployment rate. We noted that with plenty of unfilled positions, firms would be likely to raise wages to attract more workers, and this might trigger higher inflation. On the other hand, if firms held off on looking for more workers, then wage growth would be likely to ease, removing the pressure on margins and potential price increases.

Wage growth in the July employment report is still running quite hot, at a 4.4% annual growth rate, compared to the consumer price index, which in June rose at an annual rate of 3%. This would suggest that demand for labor is still outpacing supply. The Federal Reserve is watching this imbalance closely to judge whether further interest rate hikes are needed.

The good news is that the unemployment rate remains near historic lows while demand for labor is cooling, just what the Fed would like to see.

Sure, the labor market seems to be in pretty good shape and is cooling nicely without throwing a lot of workers out of jobs. But the overriding purpose of watching this market is to see if inflation pressures will come down to levels that the Federal Reserve wants.

Let’s remember that wages are not the only driving force behind inflation. With both the consumer price index and the producer price index arriving later this week, we’ll watch if the prices of shelter, food, energy and other items continue their downward path. We can be optimistic about the coming months, but as Fed Chairman Jerome Powell continually notes, “There’s still a long way to go.”