Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / How Job Openings Outpace Hires and Reshape Fed Policy
Transcript
- Lucas: So the latest JOLTS data from May landed a couple of weeks ago, and there's a detail in it that I think is getting less attention than it deserves. Luna: Which one? Because headline openings ticked up — to 7.59 million, I think — but I remember hires were basically flat. Lucas: Exactly right. Openings increased by about 9,000 from April, so not a huge move, but the direction matters. Hires, though, were essentially unchanged at around 5.8 million. And the quits rate — that's voluntary separations — also flat at 2.3 percent. Luna: So we have more jobs listed, but people aren't leaving their current roles as much, and companies aren't actually filling those open positions at a faster clip. Lucas: Right. And that gap — the spread between openings and hires — has been widening. If you look back over the last six months, openings have hovered between 7.4 and 7.6 million, but hires have stayed stubbornly around 5.7 to 5.8 million. That's a roughly 1.8 million-person gap. Luna: And historically, that gap was much smaller before the pandemic. In 2019, openings and hires were almost in lockstep. Lucas: Yeah, the pre-pandemic ratio was roughly 1.2 openings per hire. Now it's around 1.3. It doesn't sound like a huge difference, but when you multiply it across the whole economy, it suggests a structural friction in the labor market — companies are trying to hire but can't find the right workers, or workers are being more selective. Luna: And that's where the Fed comes in. Because if openings stay elevated but hiring doesn't accelerate, wage growth could stay hot without a corresponding increase in employment. Lucas: That's the key tension. Average hourly earnings in June were up 4.1 percent year-over-year, which is still above the Fed's comfort zone for 2 percent inflation. If wages keep rising because companies are bidding for a limited pool of workers, that could feed into services inflation — the sticky part. Luna: But at the same time, the unemployment rate dropped to 4.2 percent, and initial jobless claims just plummeted to 187,000 — that's super low. So the labor market is tight by any measure. Lucas: It is. And I think that's why Fed Governor Kevin Warsh's recent comments are so interesting. He's been homing in on three specific phrases in Fed communications — I think he's trying to signal a shift in how the committee interprets these labor market numbers. Luna: Right, I read that CNBC piece. He's focused on phrases like 'labor market tightness,' 'wage-price spiral risk,' and 'quits rate as a leading indicator.' He seems to be arguing that the old framework — looking at unemployment alone — is outdated. Lucas: Exactly. And the quits rate is a fascinating metric. When workers quit, they usually do so because they have another job lined up, often at higher pay. A rising quits rate historically predicts faster wage growth. But since early 2023, the quits rate has been trending down — from 2.9 percent to 2.3 percent now. That suggests workers are less confident about jumping ship. Luna: So even though openings are high, workers are staying put. That could mean the bargaining power has shifted back toward employers, at least a bit. Lucas: And that's a scenario where wage growth could moderate without a spike in unemployment. The Fed might see that as a 'soft landing' path — inflation cools without a big job loss. Luna: But we're not there yet. Wages are still growing at 4 percent-plus. So the Fed has to decide: do they cut rates now to support the economy, or wait to make sure inflation is truly under control? Lucas: And that brings us to the other data point that I keep coming back to — the quits rate is also a signal for the Fed's favorite inflation gauge, core PCE. Core PCE is still running around 2.6 percent year-over-year as of May, which is above the 2 percent target. If wage growth stays hot, services inflation might not come down as fast. Luna: So if you're Warsh, you're probably arguing for patience. Keep rates where they are until you see either the quits rate pick up again — which would signal overheating — or wage growth dropping below 3.5 percent or so. Lucas: Yeah, I think that's the framework. And you can see it in the bond market, too. The ten-year Treasury yield has been climbing — it's now at 4.70 percent, up about 3.6 percent in the last five days. That suggests the market is pricing in a higher for longer rate environment. Luna: Walking through the economy with us has made something click for a lot of listeners — I hear that all the time. And it's why we deliberately don't run ads on these shows. Lucas: Yeah, that's a choice we made from the start. If that approach resonates with you and you want to support it, the link is buy me a coffee dot com slash fexingo. No pressure, genuinely — just a way to keep this ad-free. Luna: Exactly. And it really does help. So back to the labor market — because I want to get into something else. Lucas: Let's do it. Luna: We talked about the gap between openings and hires. But there's also a geographic dimension. Job openings are concentrated in certain sectors — health care, leisure and hospitality, and government — while manufacturing and retail are actually seeing declines. Lucas: That's a great point. The JOLTS data by industry shows that health care and social assistance had over 1.8 million openings in May, which is about a quarter of all openings. Leisure and hospitality had about 1.2 million. Meanwhile, manufacturing openings dropped to around 500,000 — down from 600,000 a year ago. Luna: So the mismatch isn't just about skills — it's about location and sector. A laid-off manufacturing worker in Ohio might not be able to take a healthcare job in Florida. Lucas: Exactly. And that's a structural issue that monetary policy can't fix easily. The Fed can't train nurses or build hospitals. That's why some economists argue that the labor market is actually looser than the headline numbers suggest — because the available workers aren't in the right places. Luna: But the Fed does care about the aggregate. And right now, the aggregate looks tight: low unemployment, low claims, high openings. Lucas: It does. But the quits rate is the key leading indicator. If it stays at 2.3 percent or drops further, wage growth should slow. If it ticks back up, then the Fed might have to react. Luna: And with Warsh signaling that he's watching that number, I think we can expect the Fed to emphasize the quits rate more in their statements going forward. Lucas: Yeah, I think that's right. In the July FOMC statement, which is coming up next week, I'd look for any language about 'labor market rebalancing' or 'quits rates normalizing.' If they add something like that, it's a sign they're shifting their framework. Luna: So let's say the quits rate stays low, and wage growth moderates to, say, 3.5 percent by the end of the year. Does the Fed cut in September? Lucas: It depends on inflation, too. Core PCE needs to be below 2.5 percent convincingly. But if both labor and inflation data cooperate, I think a September cut is possible. The fed funds rate is at 3.63 percent — that's restrictive. If the economy is slowing, they'll want to ease. Luna: But we haven't seen slowing yet. GDP growth is still positive — real GDP grew at 2.1 percent annualized in Q1. And consumer spending, despite some warning signs, held up. Lucas: Right. The World Cup gave bars and restaurants a boost in June, but the Fed's Beige Book noted some softness elsewhere. So it's a mixed picture. That's why the JOLTS data is so important — it's one of the few real-time signals we have on labor demand. Luna: And the gap between openings and hires — that 'hiring chill' — might be the most important number. Because it tells us that even though firms want to hire, they're not actually doing it. That could be a leading indicator of a slowdown. Lucas: Or it could be a sign of structural mismatch, which is less cyclical and more persistent. Either way, it's worth watching. And the Fed is definitely watching it. Luna: Alright, so to sum up: JOLTS openings up, hires flat, quits low. Fed focused on quits rate. Warsh signaling a framework shift. And the bond market pricing in patience. Lucas: That's the story. And we'll see if the July jobs report next week confirms or contradicts this picture. Until then, keep an eye on those quits. Luna: Absolutely. Thanks, Lucas. Lucas: Thanks, Luna.