The US labor market has taken a bit of a back seat as the Fed focuses everything on getting inflation down. But, that might be about to change. There are some signs that traders need to be aware of for when the Fed might suddenly return to worrying about its second mandate. This is particularly relevant in the context where there is increasing speculation around when the Fed will start slowing its rate hikes.
As inflation was rising, the concern was that a price-wage spiral would develop. But for over a year now, wages have not even kept up with inflation, let alone pushing it forward. As higher interest rates bite, and more and more companies report that they will slow hiring, the next concern is when will the labor market flip. That is, more people seeking work than there are jobs for them.
Looking into the details
The latest BLS survey shows that there were 10.7M job openings in September. But there were only 6.1M seeking work. Despite there being over 4.6M jobs than there are jobseekers, there still hasn’t been a major increase in average wages. But, over the last couple of months, that gap has started to close. The ratio, on the other hand, has not, with the number of jobseekers to offers matching multi-decade lows. This reflects a trend where the number of job offers has been falling, and so has the number of people looking for work.
One of the assumptions over the last few months has been that as inflation rises, more people would be prompted to seek work. But the participation rate has remained stubbornly just above 62%, and is forecast to remain there in the latest data release. As long as the number of job openings remains above the number of unemployed, and the participation rate remains low, the jobs market is likely to remain off the Fed’s radar.
What to look out for
Before the pandemic started, an NFP number of around 200K job adds was considered normal, and would be expected to keep the Fed happy. This time around, NFP are forecast to come in at 200K, down from 288K as last reported. The unemployment rate is expected to tick up to 3.6% from 3.5%, which could give some people deja vu from 2019.
But a deeper dive into the figures shows some worrying signs. The ADP jobs survey was released yesterday, and is still not considered predictive of NFP despite the new methodology. However, it does prove some interesting understanding of the jobs market, and what we might see in some of this month’s NFP components.
The bottom line
ADP showed that the bulk of job creation was in the leisure and hospitality sectors, which is to be expected in the middle of summer. However, those jobs tend to be lower paid, and that likely contributes to the expected slowing growth in average hourly wages. That was also reflected in BLS data, showing that job openings increased in accommodation and food services, but declined in manufacturing.
In other words, the jobs market continues to be tight in the areas of lower skilled, lower pay. But people who wish to switch to higher paying jobs are starting to struggle. That doesn’t mean the labor market is loose, but it could be soon.
