IN financial markets, old habits die hard. The S&P 500 Index initially retreated Wednesday after a Labour Department report ostensibly showed unwanted strength in the job market.
Traders feared the report would goad the Federal Reserve (Fed) into another interest-rate increase next month, but that’s unlikely to be the case on its own.
In fact, labour market durability is starting to become an asset rather than a liability.
The Job Openings and Labour Turnover Survey showed the number of available jobs in the United States rose to 10.1 million in April, pushing the ratio of jobs to unemployed workers back to 1.8 – on the surface an elevated reading on a statistic that Fed chairman Jerome Powell has referenced at many of his recent press conferences.
Yet a more holistic view of the labour market hints that it’s on an almost ideal trajectory given the circumstances: cooling but without entering a deep freeze.
Private non-farm payrolls have been adding about 182,000 workers a month over the past three months, reverting to the pre-pandemic (2017-2019) mean.
The job growth trend is converging on the pre-pandemic normal.
The rate at which workers have been quitting their jobs (presumably for better, higher-paying ones) fell to 2.5 per 100 workers for the same period, approaching the pre-pandemic average of 2.2.
Fewer US workers are quitting their jobs, reducing wage pressures.
And then there were job openings. Notwithstanding the one-off spike, the three-month average shows they’re clearly trending down.
The trajectory should matter as much as the level.
The job openings rate is still quite elevated but trending lower.
As recently as last year, it was easy to understand why policymakers and investors would have received Wednesday’s job openings data with a sense of foreboding, but those were different times.
Inflation was still accelerating, and no one could say for sure what role the labour market was playing.
Today, inflation has roughly been contained (though clearly not vanquished), and most evidence suggests that the labour market was never at the heart of the problem anyway.
As new research from the Federal Reserve Bank of San Francisco showed Tuesday, labour-cost growth has had a “small effect” on inflation, both overall and in the non-housing services category, where labour is a big proportion of company costs.
The analysis found that recent increases in the employment cost index explained about 0.1 percentage point of the three percentage point increase in core personal consumption expenditures inflation.
That should help Powell get over any apparent fixation he may have had with the job openings data.
In reality, recent comments suggest he was already well on his way there.
At his press conference in May, he acknowledged that while wages and prices tend to move together, “it’s very hard to say what’s causing what.”
At this point, the most plausible story is that higher inflation drove demands for higher wages and that wages will cool when prices come under control.
Ultimately, only inflation data can push the Fed toward meaningfully tighter or looser monetary policy.
By mid-afternoon, the market had mostly gotten over its knee-jerk reaction.
Stocks recovered and Treasury yields fell after Fed governor Philip Jefferson and Philadelphia Fed president Patrick Harker – both voters on the Fed’s rate-setting committee – signalled they were inclined to skip an interest-rate increase at the next meeting to see how the economy develops.
Based on what they and their peers have said, the policy rate may yet require some fine-tuning but nothing like the shock-and-awe rate increases of 2022.
Knowing what we know now, the key economic risks centre on a recession, not an inflationary wage-price spiral.
The 500 basis points of Fed rate increases in the past 13 months point to growing risks of destabilising shocks.
At the same time, the resumption of student loan payments later this year and modest spending cuts planned for 2024 under the debt-ceiling deal struck over the weekend in Washington could play some role in undercutting economic growth.
If the United States is going to defy the sceptics and avoid a downturn, it will be because of shock absorbers like the surprisingly durable labour market.
At this stage, that’s something to celebrate rather than a cause for consternation. — Bloomberg
Jonathan Levin is a Bloomberg journalist covering the Latin America and US markets. The views expressed here are the writer’s own.