Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / What Falling Job Openings Tell Us About the Economy
Transcript
- Lucas: We just got the May JOLTS report a couple of weeks ago, and the headline number was seven point five nine four million job openings. That's up ever so slightly from April's revised seven point five eight five million. The market barely moved on it. Luna: Right, because on its own, a bump of nine thousand openings is noise. But what's interesting is the bigger trend: openings have been trending down from the peak of over twelve million back in March 2022. Lucas: Exactly. And that's the story. The labor market is cooling, but the question is whether it's cooling to a normal level or something more concerning. The ratio of job openings to unemployed workers is a key metric here. It's currently around one point two, meaning there are about 1.2 jobs available for every person actively looking. Before the pandemic, that ratio hovered around one point two as well. Luna: So you're saying we're basically back to pre-pandemic tightness. But that's not what the Fed wants to hear, right? They've been trying to cool the labor market to bring down inflation, and if it's already back to normal, maybe they've done enough. Lucas: That's the optimistic read. But there's a wrinkle: the labor force participation rate. We talked about this a couple of episodes ago, but it's worth revisiting. The participation rate fell to sixty-two point five percent in June, which is the lowest it's been outside of the pandemic era in fifty years. That drop means the pool of available workers is shrinking, which could keep upward pressure on wages even if job openings decline. Luna: And we saw average hourly earnings rise to thirty-seven dollars and sixty cents an hour in June, up from thirty-seven fifty-one the month before. That's a three point two percent annualized gain. Not runaway, but still above the Fed's comfort zone. Lucas: Right. And the Fed's preferred inflation gauge, core PCE, is running at around two point eight percent. So wage growth is still outpacing inflation, which is good for workers but keeps the Fed on edge. The bond market seems to be pricing in that tension. The ten-year Treasury yield is at four point five two percent today, up about twelve basis points in the last week. Luna: Even though the breakeven inflation rate, which is the market's expectation for average inflation over the next ten years, is stuck at two point two four percent. So the bond market is demanding a higher real yield, not just more inflation compensation. Lucas: That's a key distinction. The rise in nominal yields is coming from a higher term premium — investors want more compensation for holding long-term bonds, perhaps because of uncertainty about the fiscal outlook or the path of rates. The Fed funds rate is at three point six three percent, and the market is pricing in a cut later this year. But if the labor market stays this tight, the Fed might hold off. Luna: And the payrolls number we got last week for June was only fifty-seven thousand new jobs. That's a sharp slowdown from the previous months. The unemployment rate ticked down to four point two percent, but that was driven by people leaving the labor force, not by people finding jobs. Lucas: So we have this mixed picture: job openings are declining slowly, payrolls growth is slowing, but the labor force is also shrinking. It's not a straightforward signal. The Fed is going to have to parse this carefully. I think the JOLTS data, especially the quits rate and the hires rate, give us a better sense of the underlying dynamics. Luna: The quits rate has fallen back to pre-pandemic levels, around two point two percent. That suggests workers are less confident about finding a better job elsewhere. The hires rate is also down. So the market is less dynamic than it was a year ago. Lucas: Which is exactly what the Fed wants. They've said they want the labor market to come into better balance. The question is whether the balance is being achieved through a gradual cooling or a more abrupt slowdown. The data so far points to gradual, but the participation drop is a wildcard. Luna: If we look at the number of job openings in specific sectors, we see a huge divergence. Professional and business services have seen openings fall by about a third from their peak. But sectors like leisure and hospitality and healthcare are still struggling to find workers. The openings there remain elevated. Lucas: That's a good point. The labor market is not monolithic. The Fed's rate hikes have cooled the interest-sensitive parts of the economy, like tech and real estate, but services that rely on in-person work are still tight. That's why we're seeing this sticky wage growth in those sectors. Luna: And speaking of real estate, the housing market is a good example of how rate hikes have worked. But the broader economy is still consuming a lot. Nominal GDP is over thirty-one trillion dollars, and real GDP growth annualized was two point one percent in the first quarter. That's not a recessionary number. Lucas: So the economy is still growing, but the labor market is losing momentum. That's the classic soft landing scenario. But the participation drop complicates it. If people are dropping out because they're discouraged, that's a bad sign. If they're dropping out because of demographics — baby boomers retiring — that's structural and the Fed can't do much about it. Luna: The data from the June jobs report showed that the drop in participation was concentrated among prime-age workers, twenty-five to fifty-four. That's concerning because prime-age participation had been recovering steadily since the pandemic. A reversal there suggests something more than demographics. Lucas: That is a worrying sign. If prime-age workers are leaving the labor force, that reduces the economy's productive capacity and could add to inflationary pressures. The Fed would have to keep rates higher for longer to bring inflation down to two percent. The bond market seems to be pricing that in with the higher term premium. Luna: So the JOLTS number, even though it was a slight uptick, fits into a narrative of a labor market that is cooling but not collapsing. The key is whether the cooling continues at a pace that brings wage growth down without causing unemployment to spike. Lucas: And that's the million-dollar question. The Fed is data-dependent, and the data is sending mixed signals. But one thing is clear: the job openings rate, which is openings as a share of total employment plus openings, has fallen from a peak of seven point four percent to around four point six percent. That's a significant decline, and it's consistent with a labor market that's moving toward balance. Luna: And the Beveridge curve, which plots the vacancy rate against the unemployment rate, has been shifting. It's not back to pre-pandemic levels yet, but it's moving in the right direction. That suggests the Fed can achieve a soft landing if they navigate carefully. Lucas: Right. The Beveridge curve shifted out during the pandemic, meaning we needed more vacancies for a given unemployment rate. It's been shifting back in, which is encouraging. But the participation issue could slow that shift. Luna: You know, if walking through the economy with us has made something click — like understanding why the JOLTS number matters for your own job search or your investments —, you might consider supporting the show. It's an easy way to tell us this is worth your time. Lucas: Honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. No pressure, just a simple way to keep the show ad-free and focused on the data. Luna: Yeah, it helps us keep doing episodes like this, digging into the numbers without any noise. So, back to the JOLTS data — I want to highlight one more thing: the number of job openings in construction actually rose in May. That's interesting given the housing market slowdown. Lucas: It is. Construction openings have been relatively stable, which might reflect ongoing demand for infrastructure and energy projects. The Inflation Reduction Act and the CHIPS Act are still pouring money into the economy, and that shows up in labor demand for construction. Luna: So fiscal policy is providing a floor for certain sectors even as monetary policy cools others. That's another reason the data is so mixed. Lucas: Exactly. And that's why the Fed can't just look at the aggregate numbers. They need to look at the composition. The JOLTS breakdown by industry gives them that granularity. My takeaway from this month's report is that the labor market is normalizing, but with a few yellow flags — the participation drop being the biggest. Luna: So if you're a job seeker, what does this mean? The quits rate is down, so it's not a great time to switch jobs aggressively. But openings are still above pre-pandemic levels in many sectors, so there are opportunities. Lucas: I think the advice would be: be patient, but don't be afraid to negotiate. Wage growth is still positive, and employers in tight sectors like healthcare are still competing for talent. For investors, the bond market is sending a signal that the Fed might need to keep rates higher for longer, which could pressure equities, especially growth stocks. Luna: We'll see how the next few JOLTS reports play out. The June report comes out on July 29, and that will give us a clearer picture of whether the cooling is continuing or if we're hitting a plateau. Lucas: And that'll be right after the Fed's next meeting at the end of July. So the data flow is going to be intense. We'll be watching closely.