US labor market shows signs of slowdown and puts Fed on alert

With signs that the labor market is losing momentum, economists and some Federal Reserve officials are increasingly concerned that tough times may lie ahead for American workers.

This year, companies are advertising fewer jobs and worker resignations are falling as unemployment rises from low levels, signaling an end to the historically tight working conditions that characterized the rapid recovery from the shock of the pandemic.

Strong hiring has so far helped the economy weather the Fed’s aggressive monetary tightening, which pushed interest rates to their highest levels in two decades. With inflation still above the central bank’s 2 percent target, there are fears that any further deterioration in the labor market could create an avalanche effect and threaten economic growth.

“Any change in the labor market outlook could have significant implications for the direction of the economy and monetary policy,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “If there is one thing we know for sure, it is that conditions change very quickly.”

Two key reports from the Bureau of Labor Statistics this week – Tuesday’s monthly job openings update and Friday’s update on broader employment trends – will provide further clues as to where the labor market is headed.

The Job Openings and Labor Turnover Survey (JOLTS) released last month showed that the total number of job openings fell to 8.1 million in April, a three-year low. That’s more than a third less than the peak of 12.2 million in 2022, when employers suffering from labor shortages struggled to keep up with rising demand as the economy reopened.

There are currently only 1.2 job advertisements for every job seeker, similar to before the pandemic. The termination rate has also returned to pre-Covid-19 levels at 2.2% in April.

Kelly Bonn, a headhunter and leadership coach in St. Petersburg, Florida, said inquiries from job seekers asking for help have increased by about 30% since the end of 2023. Bonn said it can often take two to five months to find a job today, compared to one or two months in 2021 and 2022.

“Employers are definitely taking their time and being more selective about who they hire,” she said. At the same time, employees have become more cautious about leaving their permanent jobs for new opportunities: “They don’t want to be unemployed in this market.”

Fed officials remain largely optimistic about the labor market situation, but acknowledge increasing risks.

“Overall, we see a still very strong labor market, but not the overheated labor market of two or even a year ago,” Fed Chairman Jerome Powell told reporters on June 12 after central bank officials left interest rates unchanged and scaled back their forecasts for rate cuts in 2024.

‘Turning point’

Some economists are now wondering whether the market is also more vulnerable to a downturn. Jan Hatzius, chief economist at Goldman Sachs, recently spoke of the market being at a possible “tipping point” where a further significant weakening in demand for labor will not only translate into fewer job openings but also higher unemployment.

“A future slowdown in the labor market could lead to higher unemployment as businesses have to adjust not just job openings but actual jobs,” said Mary Daly, head of the San Francisco Fed, in a speech on June 24. “At this point, inflation is not the only risk we face.”

In recent months, it has become more difficult to monitor the labor market for this potential turning point, with various indicators in the monthly BLS hiring report sending conflicting signals.

On the one hand, the data show that employers have created an average of 248,000 new jobs per month since the beginning of the year – a strong pace that has exceeded economists’ expectations and may be partly due to a surge in immigration.

But the unemployment rate – which is measured by a survey of households rather than businesses – rose to 4 percent in May, above its low of 3.4 percent last year.

“We are facing ambiguous outcomes and we need to manage that uncertainty about the data,” Powell said on June 12.

What makes the moment all the more critical for the Fed is past experience that labor market losses can pile up quickly once they get going. Unemployment rose gradually from 4.4% in March 2007 to 5.1% a year later as the economy slowed as the financial crisis began to unfold. As the recession took hold, the unemployment rate rose even faster, reaching 7.3% in late 2008 before peaking at 10% the following year.

So far, hiring and wage growth have remained stable in the data. But the general conditions have changed significantly. One sign of this is that employers are largely no longer offering the enormous incentives they have offered in recent years to recruit new employees, says Becky Frankiewicz, North America president of the staffing service provider ManpowerGroup.

“It was almost as if we were asking ourselves what we could do with the workers to get their attention,” Frankiewicz said. “All of that has really stabilized. Now it’s much more going back to base salary.”

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