The U.S. labor market is starting to cool after an unusually robust post-pandemic period, making it key to whether the Federal Reserve can cut interest rates as it inched closer to reaching its inflation target.
Monthly employment gains remain strong but are down from an average of more than a quarter-million last year. The unemployment rate rose to 4.1% in June from a half-century low of 3.4%. The number of unfilled jobs is falling, layoffs are rising and wage growth, which is closely tied to services inflation, is slowing. Average hourly earnings rose 3.9% year-over-year in June but are down from a peak of about 6% in early 2022.
“The labor market is no longer the big source of inflationary pressure that it once was,” said Jeff Schultz, head of economic and market strategy at ClearBridge Investments.
There’s no need to panic. The job market is no longer overheated but remains strong. Still, the Fed is eager to prevent a deeper economic slowdown that could result in significant job losses and even a recession.
The Fed has recently begun to focus more on the maximum employment aspect of its dual mandate after addressing the price stability aspect by fighting inflation with higher interest rates. Fed officials are considering preemptive rate cuts as early as its September policy meeting, based on futures market pricing, to achieve what’s called a soft landing.
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Several Fed policymakers have noted recently that labor supply and demand are in better balance than in past years. “Employment growth is not excessive when immigration is taken into account, nominal wage growth is close to rates consistent with price stability, the unemployment rate is close to what we would consider its long-run value, the job openings rate is close to its pre-pandemic level, and the involuntary layoff rate has been stable at 1 percent for more than two years,” Fed President Christopher Waller said on July 17. “We have a good chance of achieving a soft landing on the employment side of our dual mandate.”
Here are six charts that show the easing in the U.S. labor market.
The lower ratio of jobs to job seekers suggests the labor market is more balanced than it was a year ago. Fewer employers are struggling to fill vacancies, as they were in the wake of the coronavirus pandemic. Still, there are still more job openings than there are workers, creating a favorable market for job seekers.
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The Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) shows the number of unfilled job openings on the last business day of each month. Prior to 2021, it had never exceeded 8 million, but in 2022 it peaked at more than 12 million. As of the end of May, there were 8.1 million job openings in the United States.
This brings the ratio of unfilled jobs to the number of unemployed people to 1.3, down from more than double that at the end of 2022. JOLTS data for June will be released on July 30.
The weekly number of people filing first-time claims for unemployment benefits has been gradually increasing since the start of the year, another sign that the U.S. labor market is gradually cooling.
The four-week moving average of initial jobless claims has reached 235,500 since the week ending July 20, up from just over 200,000 at the start of 2024. During the same period, continuing jobless claims have remained at nearly 1.9 million, the highest level since November 2021 and above 2019 levels.
Investors, economists and the Federal Reserve are closely watching the jobless claims data, which is driven by short-term factors (Hurricane Beryl, for example, may have caused a spike in jobless claims in Texas during the week ending July 13), but is also seen as a leading indicator of how the labor market is doing. Conditions are currently easing.
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Of the 7.2 million people in the U.S. labor force in June, about 1.5 million had been out of work for at least 27 weeks. Both the number of unemployed and the number of “long-term unemployed” have been trending up this year, pointing to growing weakness beneath the surface in the market.
Workers who are unemployed for a long time miss out on opportunities to gain experience and other skills, and may find it harder to rejoin the labor force. They are also more likely to cut back on spending the longer they remain unemployed. A rise in the number of long-term unemployed can act as a drag on the economy and lead to increased unemployment.
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U.S. nonfarm payrolls rose by 206,000 in June, a healthy pace, but 58% of the gain was concentrated in two sectors: health care and government. This comes as government hiring slows due to fewer open positions and less money to spend.
Private sector employment increased by just 136,000 in June, with growth generally sluggish outside health care and social assistance. Leisure and hospitality, which added 333,000 jobs in the first half of last year, saw a net gain of just under 100,000 in the same period this year. Meanwhile, manufacturing lost 8,000 jobs last month, and retail trade lost 8,500.
The weakest part of the June employment report was the number of temporary workers, which fell by 49,000. A large drop in temporary workers has historically been seen as a leading indicator of labor market weakness, as temporary workers are often the first to be laid off when companies downsize. Temporary employment has been declining steadily since the start of 2022, but June marked the largest monthly decline in the past two years.
“The labour market has pretty much returned to balance from a supply and demand perspective,” said Gregory Daco, chief economist at EY.
One of the most visible signs of a recent labor market softening has been the steadily rising unemployment rate. The U.S. unemployment rate rose to 4.1% last month, up from 4% in May and from a record low of 3.4% in April 2023. In June, the rise in the unemployment rate narrowly missed triggering the so-called Sarm rule recession indicator, which says a recession has begun when the three-month moving average of the unemployment rate rises by at least 0.5% above the previous year’s low.
Claudia Sahm, chief economist at New Century Advisors and creator of the Sahm Rule, believes some of the recent unemployment increase is due to labor force expansion through immigration. But she says there are also “run-of-the-mill” increases in unemployment, so the rise in unemployment can’t be ignored.
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Beth Ann Bovino, the bank’s chief economist, told Barron’s that she expects the unemployment rate to continue to rise, though “not dramatically.”
Payroll data has been significantly revised over the past six months, with the Bureau of Labor Statistics removing about 250,000 jobs from its originally reported job gains.
The Bureau of Employment Statistics releases an initial estimate of total payrolls, then revises it twice, after which it remains constant until the BLS conducts its annual benchmarking process.
From 1979 through 2003, the average monthly employment revision was an increase of about 14,000. Last year, the BLS revised down its monthly employment gains by an average of about 30,000. This year, the revisions have averaged 49,000 per month. Most recently, employment estimates for April and May were revised down by a combined 111,000, making employment trends for those months appear much weaker than initially reported.
Downward revisions are not usually an indication of a healthy labor market. Large changes in payroll data can also make analyzing labor trends difficult. After incorporating the latest revisions, the average payroll growth rate in the first quarter was about 267,000 per month. Average payroll growth in the second quarter slowed to just over 177,000, but further revisions are likely on the way.
If the labor market remains weak, the U.S. could see monthly employment growth of just 100,000 by the end of the year, according to Dante DeAntonio, senior director at Moody’s Analytics.
Please contact Nicholas Jasinski at nicholas.jasinski@barrons.com or Megan Leonhardt at megan.leonhardt@barrons.com.
