Hiring 9 to 5

One sector of the economy that has no shortage of data points is the labor market. There’s high frequency data, such as weekly initial jobless claims, and widely covered data, such as non-farm payrolls and the unemployment rate. Regardless of the data point you choose to look at lately, they’re all sending the same message: the labor market is still hot.

This is what we can call an “employee’s” market rather than an “employer’s” market based on the large gap between the number of job openings and the number of unemployed people. Some of the stats are staggering. Currently, with 11.3 million job openings and only 5.7 million unemployed people, the ratio of openings-to-unemployed is almost 2.0. Pre-pandemic, this ratio was only 1.2.

In a Hurry to Get Things Down

Despite indicators across other parts of the economy that are cooling, including housing, consumer sentiment, and manufacturing activity (to name a few), the labor market continues to churn out signals of strength. But in this environment, that may not be a good thing considering the Federal Reserve’s dual mandate of achieving two things: maximum employment and stable prices.

With labor market data signaling that the first part of their mandate is in good shape, with a decent amount of room to cool before it becomes worrisome, the stronger the jobs market, the higher the expectation for Fed tightening. Right now, the Fed is in a hurry to cool prices, so in this case, good news for the labor market is bad news for rate hikes.

But, the labor market is one of the last shoes to drop in a period of economic weakness, and it begs the question: how long is the lag and what does the data suggest in terms of when we might expect the labor market to slow down (and in turn, the Fed to slow down)?

Take This Job and Love It

In order to answer that question, we need to identify a leading indicator of weakness in labor, which we’ve uncovered through a survey conducted by the Conference Board. The consumer confidence survey includes questions about the labor market and gauges whether consumers feel that jobs are plentiful, not so plentiful, or hard to get. When looking at how consumers are feeling about how plentiful jobs are, the data series has a curiously strong foreshadowing relationship with recessions. None of this is an exact science, but what we found was that the peak in “plentiful” has led the peak in employment by an average of nine months.

With the apparent peak in how consumers felt about jobs being plentiful appearing to have happened in March of this year, history would suggest that a peak in employment could occur late 2022 or early 2023. In other words, if this relationship holds, we’ll keep adding jobs for another few months, but then can expect the chance of job losses to increase after that.

This all happens in a sequence, however. I would expect the first indication of cooling to show up in the job openings data. We expected to see a slow down in July’s data, but instead things heated up. Needless to say, the sequence hasn’t started yet.

As we can see from the charts, when the labor market turns, it tends to turn sharply. There’s still no guarantee that these relationships will hold, nor that we’ll see the recession many are predicting. There is, however, a decidedly strong relationship between the labor market and the Fed. The sooner the labor market cools, the sooner we can expect the Fed to retract its tightening claws.

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