On the other hand, the job openings rate just prior to the pandemic was the highest it had been since data collection began in 2002. Thus, the job openings rate now remains historically high. Still, the sharp decline in the job openings rate over the past two years signals that the tightness of the job market has eased considerably (likely due to rising participation, high immigration, and possibly a weakening of demand for labor). This bodes well for further easing of wage pressure, thereby allowing inflation to decline to the target level of 2%. Indeed, the 10-year breakeven rate, which is a measure of bond investor expectations for inflation in the coming 10 years, was 2.07% as of recently.
As always, the job openings rate varies by industry. In July, the highest job openings rates were in health care (7.7%); accommodation and food service (6.9%); transportation, warehousing, and utilities (6.1%); and arts, recreation, and entertainment (5.8%). Our own professional services industry had a job openings rate of 5.5%. The lowest rates were in state and local schools (2.3%), manufacturing (4%), wholesale trade (4.1%), and construction (4.2%).
Another important indicator is job growth. Employment in the United States grew more slowly in August than investors had expected, but faster than the long-term ability of the economy to produce jobs. In addition, the unemployment rate fell. Investors reacted to the report by pushing down equity prices, bond yields, and oil prices. The value of the US dollar, however, increased against the euro and the British pound while it fell against the Japanese yen. The US government conducts two surveys to understand labor market conditions: One a survey of households, the other a survey of establishments. Let’s begin with the establishment survey.
In August, the US economy produced 142,000 new jobs, less than expected but still the fastest employment growth since May. Job growth in July was downwardly revised to 89,000. Job growth in the United States was concentrated in just four industries. If job growth in construction, health care and social assistance, leisure and hospitality, and local government are combined, it adds up to 146,000 new jobs, more than the total job growth for the United States.
Meanwhile, employment in manufacturing fell by 24,000. Half of that decline was due to declining employment in transportation equipment. In addition, employment fell by 11,000 in retailing. In most other industries, job growth was small. For example, in our own professional services industry employment increased by only 8,000. Thus, although the headline job growth number was relatively strong, the lack of broad-based employment growth was likely a concern to investors.
The establishment survey also provided data on wages. It found that average hourly earnings were up 3.8% in August versus a year earlier, the same as in June and slightly higher than in July. Wage growth has decelerated significantly since earlier in the year, likely reflecting the impact of declining inflation and an easing of the tightness in the job market.
Also, the separate household survey, which includes the impact of self-employment, found that employment grew slightly faster in August than the size of the labor force. The result was that the unemployment rate fell from 4.3% in July to 4.2% in August. In addition, the number of people unemployed because they lost jobs fell sharply in August. As such, the household survey suggested that, at the least, labor market conditions did not worsen in August.
The latest report confirmed that the US job market is slowing. This contributed to the decline in equity prices and the slight drop in bond yields. However, as was true a month ago, investors could be overreacting. Rather than being headed for recession, the US economy appears to be reverting to a more normal and sustainable rate of growth. Recall that the US economy grew at an annualized rate of 3% in the second quarter. This cannot be sustained in a tight labor market without generating increased inflation.
Finally, the US government reported last week on the number of initial claims for unemployment insurance. The report said that there were 227,000 initial claims for unemployment insurance in the most recent week, down from 232,000 in the previous week. The four-week moving average was 230,000, down from 231, 750 in the previous week. The four-week moving average was the lowest since June of this year. In other words, the number of people initially claiming unemployment insurance remains relatively low, suggesting that businesses are not engaged in mass dismissals.
What can we infer from the three sets of data discussed above? First, the job market has weakened. Yet the data also suggests that the job market is now operating in a manner typical of the pre-pandemic era. That is, it is reverting to normal. So far, at least, the data from the job market is not signaling a deterioration sufficient to produce an economic downturn. Rather, it suggests a job market that may generate a normal level of economic growth, likely slower in the coming months than in the past year.
The fact that the economy is slowing is good news from an inflation perspective and allows the Federal Reserve to cut rates later this month with confidence. On the other hand, investors are evidently so worried that the economy might decelerate too quickly that they are now pricing in a likelihood that the Fed will cut rates by more than 100 basis points before the end of the year. Still, one might reasonably ask why the Fed should cut rates dramatically when the unemployment rate is falling while job growth is in excess of 100,000 per month.
