In writing about the economy, we’ve discussed the slow but steady signs that the labor market is softening. And those signs got a big boost with the July JOLTs report. Let’s take a look. 👀
The Job Opening and Labor Turnover Survey (JOLTs) is a great leading indicator for the U.S. job market. It’s leading in that it typically turns negative well ahead of lagging indicators like the unemployment rate and average hourly earnings, which we’ll look at later this week. 🔮
The report is broken down into job openings, hires, and separations (quits, layoffs, discharges, and ‘other separations’ like retirement or disability).
First, we want to look at the number of job openings. This tells us the demand side of the equation because it highlights how many jobs companies are looking to fill at any given time. When companies want to slow down, they typically start by reducing hiring first, opting to squeeze more productivity out of their existing workforce. 📋
Looking at the data, it’s clear that total job openings are trending lower after peaking in March 2022 at nearly 12 million jobs. While that’s still above pre-pandemic levels of roughly 7 million, a 25% reduction over the last eighteen months is a big deal. And more importantly, the number of job openings per available worker has shrunk from a ratio of 2:1 last year to roughly 1.5:1 today.
The extreme tightness in the labor market gave workers a lot of leverage over the last two years, causing them to quit their jobs and take new positions with significant pay increases. The number of quits shows how much confidence workers have in their ability to get a new, better job. And it also is an indication of upward or downward wage pressure.
Well, with July’s data, U.S. job quits are now back below their pre-pandemic peak after peaking in early 2022. The downward trend suggests workers feel less confident in their ability to get more money elsewhere and are instead staying put in their current roles. 🔻
The next major step in seeing the labor market soften is an uptick in layoffs and initial / continuing jobless claims. After companies try to get by with their current workforce, their next step to cut costs is starting to lay off workers or incentivize them to quit. That will show up in both the JOLTs data and the weekly jobless claims data as those impacted file for unemployment benefits. ✂️
So far, there’s not been a significant uptick in these figures. Although they’ve risen from their 2022 trough, initial claims remain nearly historically low pre-pandemic levels along with continuing claims. This indicates that those who lose or leave their jobs can still find employment elsewhere, which is typical in a strong labor market. 🔺
To be clear, it’s still a tight labor market by many standards. But the clear downward trends in these JOLTs leading indicators and a slight uptick in claims show that the Fed’s restrictive policy is having its desired effect (albeit slowly). That’s why bonds and stocks both rallied today, as it suggests a Fed hike is likely off the table for its September meeting (and potentially future meetings). ⏯️
The last time we saw a major development like this was in October, when job openings saw their biggest plunge in years. That helped cement the downward trend that’s continuing today. And although the Fed and market are excited to see it, workers are likely not.
Needless to say, investors will be closely watching the remaining employment and inflation data before we all head out for a three-day Labor Day Weekend. 🕵️♂️