The best U.S. labor market for workers in decades is starting to fray around the edges, but not fast enough for a Federal Reserve bent on vanquishing high inflation.
The signs of cooling are everywhere. Job openings have fallen from record highs. Hiring has slowed. Layoffs have risen. Unemployment has crept higher. And wages aren’t growing quite as rapidly.
“More broadly, there are growing signs that the once red-hot labor market is softening,” said Jim Baird, chief investment officer at Plante Moran Financial Advisors.
Yet by any measure, the U.S. jobs market is still unusually strong. Almost anyone who wants a job can find one, for one thing. And the biggest complaint businesses have about the labor market is that good help is hard to find.
“Labor shortages remain widespread,” the St. Louis Federal Reserve said in the central bank’s latest Beige Book survey of the economy.
The tight labor market poses a big challenge for the Fed. The scarcity of workers has driven up wages — the biggest expense for many companies — and threatens to prolong a bout of high inflation whose origins lay elsewhere.
Inflation has risen in the past year at the fastest pace since Ronald Reagan was president in the early 1980s. The cost of living has climbed 7.7% in the past 12 months, up from less than 2% a year before the pandemic.
One of the Fed’s two main jobs is to ensure a strong labor market, but its other directive is to keep inflation low. When the two goals conflict, the Fed has historically put more weight on reducing inflation.
Why ? It’s not because the Fed wants to hurt workers, as Chairman Jerome Powell has repeatedly stated, but because the central bank sees persistently high inflation as more damaging to the economy and the labor market in the long run compared to a relatively short period of higher unemployment.
To help bring down inflation, the Fed needs to engineer slower economic growth and chill the demand for goods, services — and labor. That means fewer workers being hired and more being fired, no matter how delicately senior Fed officials put it.
The labor market is not even close to breaking, however. Far from it.
Start with job openings. They have fallen to 10.3 million from a record 11.9 million in March, but they are still much higher now than they were before the pandemic. Job listings totaled a much smaller 7.2 million in 2020 just before the viral outbreak.
The number of new jobs being created, meanwhile, has slowed to an average of 272,000 a month in the fall from 539,000 in the first quarter. Yet the U.S. is still adding jobs at the fastest pace since the go-go 1990s.
Layoffs are rising, but only from extremely low levels. New unemployment filings, or jobless claims, have risen to 230,000 from a 54-year low of 166,000 in the early spring.
“Weekly claims ticked up a bit, but remain historically low,” said corporate economist Robert Frick of Navy Federal Credit Union.
More people are also collecting unemployment benefits. The number of people receiving checks has climbed to a nine-month high of 1.67 million, but they are still below pre-pandemic levels.
“It is taking somewhat longer for those recently unemployment to find new jobs,” said Neil Dutta, head of macroeconomics at Renaissance Macro Research
The unemployment rate isn’t giving off bad vides, either. The jobless rate stands at 3.7%, just a few ticks above the lowest level in half a century.
The strong demand for labor has resulted in a record number of workers quitting lower-paying jobs for better paying ones while those who’ve stayed have asked their employers for more compensation.
To wit, hourly pay has jumped 5.1% in the past year. While the increase is down a bit from 5.6% in March, wages are climbing at the fastest clip since 1982.
And therein lies the Fed’s problem. The central bank worries that workers will keep using their leverage to seek higher pay and thwart its effort to subdue inflation.
It’s a chicken and egg scenario, economists say. Workers are asking for higher pay in large part to cope with high inflation, but if they keep getting big pay increases, wages will then play a bigger role in keeping inflation high.
“We want wages to go up,” Powell said after the Fed raised interest rates again in November. Higher interest rates are the main tool by which the Fed slows the economy.
“We just want them to go up at a level that’s sustainable and consistent with 2% inflation,” he added.
What will the labor market look like, under that scenario? Senior Fed officials predict the unemployment rate is like to rise to as high as 5% in the next year or so.
If they’re right, the U.S. economy is not only going to stop adding net jobs soon. It’s going to start losing jobs each month.
The first evidence is likely to show up in weekly jobless claims. If they climb to 250,000 and head toward 300,000, history shows, it will be a clear sign of a deteriorating labor market and potentially the onset of recession.