Cooling of the Labor Market

by Brad Houle, CFA
Principal

Fixed Income Research and Portfolio Management

As we celebrate Labor Day this weekend, we thought it appropriate to look at the current employment situation in the United States. The job market has been surprisingly robust since the elevated unemployment due to the COVID-19 pandemic and economic shutdown. Our view has been that the U.S. economy would either have no recession or a mild recession at worst. The strength of the labor market has been the primary factor that gives us the confidence to make this prediction. Recently, we are seeing signs that the labor market is stabilizing due in part to the aggressive actions of the Federal Reserve.

 “The quits rate” is a metric that measures voluntary job separations from employment. The higher the quits rate, the more confident people are about finding a new job or retiring. From 2000 to 2023, the average quits rate has been around 2%. However, the quits rate climbed to 3% in the frenzied post-COVID labor market. At 3%, this was the highest quits rate in 20 years, as employees had tremendous power in an environment with too few workers. The last reading, however, was 2.3%, which has decreased closer to its usual level.

Another data point that suggests the labor market is normalizing is the Job Openings and Labor Turnover Survey (JOLTS), the measurement of job openings and labor turnover versus unemployed people. Typically, there are more unemployed people than there are jobs available. At the peak of the post-COVID labor market, two job positions were open for every unemployed person in the country. This ratio has started to decline and is at 1.5 jobs for every unemployed person. This cooling of the labor market should also mitigate further sharp gains in wages, which helped fuel the rise in inflation.

 On Friday, the August employment data was released, indicating 187,000 jobs were created, beating the estimated gain of 170,000 jobs. The unemployment rate ticked up to 3.8% due to more people being in the workforce and wage gains have moderated. The takeaway is that the job market is cooling nicely without falling apart, which is what the Federal Reserve would like to see.

 Despite this cooling, the labor market is still surprisingly healthy. We view the normalization of the labor market as a positive development, and our view remains that the U.S. will have no or mild recession.

 Takeaways for the Week

  • While still robust, the labor market is cooling due to the aggressive actions of the Federal Reserve

  • Our view remains that we will likely have no recession or a mild recession due to the strength of the labor market

Disclosures