April 10, 2023
Job Market Strength - Flexport Weekly Economic Report
The latest U.S. data from the Bureau of Labor Statistics (BLS) showed a job market that was slowing but still exhibiting historic strength. In thinking about what this likely means for monetary policy, the level should matter more than the trend.
In Focus - Cooling but Still Hot
Last week’s BLS March jobs report showed a very strong U.S. labor market.
The unemployment rate fell from 3.6% to 3.5%. There were 236K new jobs. For those who enjoy data deep cuts, the prime-age employment-population ratio rose to 80.7%, its highest level since May 2001. And average hourly earnings were up 4.2% over the previous 12 months.
There is an alternative interpretation of the same numbers: the labor market is cooling. In this reading, those 236K new jobs were not only below expectations but below the 334K average monthly gains over the last six months. Plus, the average hourly earnings figure is down from its 5.9% increase over the year to March 2022.
Which interpretation is right? They both are. But it’s the former, ‘excessively hot’ interpretation that matters more right now.
Here’s the chain of reasoning. For businesses and others, it’s important to know whether the economy is heading toward a recession. A key determinant of whether that will happen is monetary policy. Tightening can impact the economy directly (higher interest rates pass through to mortgage rates and slow home buying, for example) or indirectly (e.g. higher interest rates roil the banking sector, which reduces loan availability). All of which mean we’re interested in the variables that are likely to have the most impact on Fed decisions.
The Fed is legally-required to focus on two goals: full employment and price stability. The former is addressed directly by the jobs report – 3.5% unemployment would meet most anyone’s definition of full employment. The latter, inflation, is also connected to the jobs report, as there is a common economic belief that an excessively tight labor market will push up wages and, in turn, broader price inflation (this is known as a “Phillips Curve” argument).
How does this help us pick between the “too tight” and “getting better” arguments? Because each of these considerations depended on levels, not trends. If the economy is on the far side of the threshold for concern, it’s still a concern, even if it’s moderating.
The chart illustrates the point with two different takes on labor market tightness, incorporating data from the BLS Job Openings and Labor Turnover Survey, or JOLTS also released last week. The dark line (left scale) shows the rate at which American workers are quitting their jobs. Higher quits are generally taken as an indicator of labor market strength– people quit their jobs when they’re fairly confident they can find something else.
The red line (right scale) gives the ratio of job openings per unemployed person. Here ‘up’ also indicates labor market strength, and it’s notable how the two series parallel each other fairly closely, even over more than two decades.
The JOLTS data only run through February, yet one can see the dueling interpretations on display: both series are receding from recent highs, but the latest values exceed any pre-Covid numbers since the series began in December 2000.
For policymakers, it is likely to be the historic strength that matters, not the minor moderation. This report is likely to be taken as a sign for the Fed to press on with tightening.
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