The US Employment Situation

We’re coming up on another "Jobs Friday" as we start off the month of July. The US Employment Situation report has become one of the most watched reports after Inflation Reports, simply because it could mean the key to the Fed cutting rates. The Fed has said time and again, significant weakness in the job market could lead them to reconsider their stance on rate cuts.

The Establishment Survey & Household Survey

As it stands, we’re seeing signs of overall weakness in the various reports that come out - but the main two numbers that everyone watches are the Nonfarm Payroll Additions (Establishment Survey) and the Unemployment Rate (Household Survey). The Nonfarm Payroll (NFP) provides estimates of jobs, while the Household Survey provides estimates of employment status.

No doubt, much of this data is lagging and survey-based which means that they don’t carry a high degree of accuracy. But recently, we’re seeing an even bigger divergence between the two with the Unemployment Rate trending higher (fewer job additions) while the NFP shows higher job additions. Some of this can be explained away by the revisions made to the NFP report but, even the Fed Chair talked about the difference being puzzling and taking the numbers as they are.

The Unemployment Rate has now reached 4%, i.e., the Fed’s projected number for the year, while the NFP continues to add jobs, although not only has the number been trending lower but, there have been downward revisions as well.

Other Data Points

Average Hourly Earnings

Wages are an important indicator of the strength of the labor market. When there is a lack of people willing to work, a company will obviously pay more to attract and retain employees. However, as the economic situation becomes more challenging, companies may have to cut costs. People may get fired, there may be an influx of workers due to immigration or people who had savings / gigs / self-employment are looking to go back to work. All of these are applicable to the US right now and could be the reason that wages are gradually declining = weakness in the labor market

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Average Hours Worked

Average hours worked is declining. This is usually a telltale sign of the labor market softening. Average Hours Worked decline when there are more part-time workers - when companies don’t want to make a major commitment to a full-time employee. It could also mean that companies are cutting hours for existing workers, to pay them less. But basically, some weakness in the labor market.

Job Openings

This comes from the JOLTS report, which usually comes out right before the Employment Situation Report. As of the last reading, the number is down to 8.059 million, which as you can see from the chart is still above the pre-pandemic levels but, gradually declining. We’ve said that the level needs to come down to 7.5 million for balance to be restored.

The Indeed Jobs Posting tracker is also showing fewer job postings, which ties in with the JOLTS report.

Quit Rates

Next up we have quit rates. We see this dropping. not surprisingly, we had a lot of people quit during the pandemic primarily because of the wealth effect. There was also fear, particularly in the healthcare sector. And other reasons, such as having to take care of their kids at home.

As the economic situation becomes challenging, fewer people quit their jobs, so we see the quits rate decline. As of the last reading, the quits rate has declined to below pre-pandemic levels.

The Bottom Line

The US Labor Market staged a remarkable recovery, and ended up being extremely tight where there was a massive imbalance between demand and supply. The market is moving back into better balance, as Fed Chair Powell likes to say. Well, I could add that we are in fact, seeing some signs of weakness. How fast this develops into a full blown crisis, no one can tell. But, we do know that the economy still remains relatively resilient and this could mean that the labor market’s weakness develops gradually - gradually enough that the Fed can have their higher for longer plan!

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