Jerome Powell has the most difficult job in America. The Fed Chairman and the Federal Reserve Open Market Committee are tasked with lowering inflation and they primarily have only one blunt tool to accomplish this goal, adjusting interest rates. More specifically, they want to increase short-term interest rates to deliberately slow economic growth, all without causing a recession. One place that the aggressive actions of the Fed should show up is the employment market. The employment market has been robust, characterized by low unemployment and an abundance of job openings that have gone unfilled. However, this week, we saw employment data that can only be characterized as … mixed.
This week, the Labor Department’s Job Openings and Labor Turnover Survey, or JOLTS, number for October was released. The number of unfilled jobs dropped to 10.3 million from 10.7 million a month before. According to the Bureau of Labor Statistics, the number of unfilled jobs peaked in March 2022 at nearly 12 million. The ratio of unfilled positions to unemployed people declined from 1.9 to 1.7. This massive number of unfilled positions has been a mystery with no simple explanation. One theory posits that due to the tight job market, companies are thought to be “double ordering” position postings in their search for a quality applicant which then inflates the number of open jobs. Additionally, there is thought to be "labor hoarding" in the marketplace. Labor hoarding is when a business will retain employees rather than laying them off because it is so expensive to hire and train employees. Companies make the choice to take the short-term pain of higher payroll costs in order to save the potentially long-term higher costs of hiring and training new employees. Another aspect of the labor market that points to a softer environment is the quits rate, a measure of people voluntarily leaving their jobs, which dropped to 2.6%, the lowest since May 2021. Lower levels of people voluntary leaving jobs show a declining confidence in the labor market.
On Friday we received data from another release as the employment report for November came out that showed payrolls increased by 263,000 - well above the consensus estimate of 200,000 jobs. In addition, unemployment remained at 3.7% and wage growth characterized by average hourly earnings was stronger-than-expected. This data was in stark contrast to the JOLTS data from earlier in the week. Economic data is often lumpy and impacted by idiosyncratic events over short-term time horizons. Further, there is a lagged effect in the economy from the actions of the Federal Reserve that can take up to a year to take effect.
Despite these weeks’ mixed employment data, ultimately, we think the Fed will be successful in cooling inflation as we do believe inflation has peaked but has been stubborn in decreasing.
Takeaways for the Week:
There is a lagged effect of the aggressive Fed increasing interest rates that resulted in mixed employment this week.