Labor Market Analysis

The FED has work to do. It appears our challenges are moving from Inflation to Employment issues and further Earnings compressions.

There are more data points than just Unemployment and NFP. Let’s explore.

In my opinion, the Labor market holds the key. We have a tight labor market as demand for workers exceeds supply. Nominal wages have grown significantly. Wage inflation fuels nominal spending which continues to drive nominal demand in a loop which further facilitates entrenchment. That seems to already be occurring in wage and price settings affecting financial and household decisions. Therefore, Increased tightness in labor markets is placing pressure on consumer prices. We need to reduce the nominal spending at the source so I believe it is necessary to soften the labor market otherwise they will keep chasing each other. However, the question is how much softening is needed for stability.

As we look deeper from our manufacturing b2b view, we see skills set imbalances as a key driving factor. Expectations have changed significantly on both sides. Higher turnover & seeking expenses for businesses due to these mismatches coupled with a time intensive sifting process from “too many” mismatches with the qualified applicants getting lost in the mix.

How much to soften? Let’s look at the data.

The unemployment rate is only 1 data point.

Very Low Unemployment at 3.7% and NFP at 263k new jobs but are those numbers really reflective of what is going on? Back in August I reported and tweeted about the disparity between the household and establishment surveys. They utilize different methods in data collection and being a skeptic, I looked deeper. There has been a rise in multiple jobholders since early 2021. In the household survey there is no duplication but with establishment survey (which is what is used to calculate the jobs count) employees working at greater than one job and appearing on more than one payroll are counted separately for each appearance. So, are the job numbers as high as reported or much less? Is this noise or are these inconsistencies worth further study?

Recent initial claims are at the lower end plus there are data lags and delays for these claims. For softening there should be a rise and studies demonstrate for economic weakness these should exceed about 400k.

Although the recent JOLTS number “changed little” it is inarguably still high. 2 rate of job openings ratios that are effective measures to examine the tightness of the labor market & can assist us in explaining price and wage pressures are Beveridge Curve (job openings to unemployment) and fill rate (job openings to hires) both suggesting less softening may suffice with fill rate suggesting the least. These patterns all imply that an elevated number of people taking jobs are not coming from the unemployed. As I said before, the number of multiple job holders have been increasing since early 2021. (Both ratios very high with fill rate less above its trend).

Both indicators help explain inflation and wage dynamics.

We find that inflation appears to be more sensitive to changes in the fill rate (openings-to-hires ratio) than the Beveridge Curve (openings-to-unemployment ratio). On one hand, this means that elevated openings relative to hires have done more to contribute to inflation; on the other hand, it means that as openings come down relative to hires price pressure should moderate.

The unemployment data is only one point and difficult to assess where these workers are coming from. It appears that many are coming straight into jobs from outside the labor force or are quitting their jobs to take new ones. So if the labor market these days is very tight with many job openings available while many of these openings are getting filled then it is quite possible that the unemployment may not need to rise substantially for the labor market to soften to an acceptable level. That is a concern if the FED attempts to soften “too much”.

A concern for the labor market is that between tightening liquidity and higher rates as well as other aforementioned employment data possible inconsistencies, unemployment can trickle upward at an increasing pace, and it may be very difficult to stop once it starts. Therefore, in my opinion rate cuts are a remote possibility very late next year or early 2024 if the labor market weakens significantly coupled with a moderate to severe recession.

Nonetheless, we should continue to experience significant pressure on the labor market with declining negative productivity and low labor force growth even with about 2.8% real growth.