Last week, two US jobs report provided just what investors wanted to hear: the US jobs market is coming off the boil, or – as some economists have said – is “normalizing.” The reason the jobs market is garnering so much excitement is because recent data suggests a so-called soft landing might be in store. Could a gradually slowing jobs market in fact be a harbinger that the Fed might just pull a proverbial rabbit out of its hat in its ongoing efforts to rein in inflation without destroying so many jobs that the US economy tumbles onto recession? It is too soon to say for sure. The recent data might turn out to be an aberration if subsequent readings suggest that the jobs market (still) remains too tight, stoking inflation, or that unemployment is worsening much faster than expected. Or subsequent readings might continue to show a more gentle and benign increase in unemployment, a necessary evil to combat inflation. The latter would mean that the US economy is on a well-balanced glide path towards lower inflation without incurring significant job losses. Since employment reports are a key area of focus for investors and economists now, this article looks at the most relevant jobs data periodically released, as well as where we stand and how we got to this point.
The jobs reports that seem to matter
There are three US jobs reports that receive the most attention, two of which are released monthly and one weekly:
“The Employment Situation”, or the monthly “Jobs Report”. This is generally published on the first Friday of the month (pertaining to the preceding month) by the Bureau of Labor Statistics (“BLS”), an agency of the US Department of Labor (“DoL”) It includes the change in nonfarm payroll employment and the unemployment rate, along with much more granular data for these metrics by demographics, e.g. age, ethnicity, sex, etc.
The “Job Openings and Labor Turnover Survey”, better known as the “JOLTS Report”, also published by the BLS. This is usually released towards the end of the month for the preceding month, and measures the number of job openings, or – in other words – the available jobs to be filled posted by companies across the country. Again, more granular detail is provided in the full release.
“Unemployment Insurance Weekly Claims”, or “Initial Jobless Claims”. This is published by the DoL every Thursday morning at 830am (EST), for the week ending on Saturday the week before. This provides the number of people filing for unemployment for the first time.
The table below provides a summary of these three releases.
The nuances of the reports and what they mean
As is often the case, the devil is in the detail as far as interpreting the data coming from these reports, mainly because the definitions of some of the pertinent terms are not obvious to inexperienced readers. For example, characterizations like “employed” and “unemployed” are not as simple as they might sound, and the way they are defined has important implications for key ratios like the unemployment rate and the participation rate. Here are a few interesting facts to note:
“employed” means a person age 16 or over who has worked at least one hour for compensation the week of the survey (unless on holiday, maternity/paternity leave, etc.)
“unemployed” means a person age 16 or over who was not employed but was available to be employed, and has applied for at least one job in the last four weeks
“labor force” is the sum of employed and unemployed people
“people not in the labor force” refers to unemployed people who have not looked for a job in the last four weeks. The chart below (source: BLS) best illustrates some of these definitions.
These definitions and others have an impact on the key ratios reported by the press and monitored by investors, including:
The “unemployment rate”, which is the number of unemployed people divided by the labor force (total of “employed people” and “unemployed people”)
The “participation rate”, which is the labor force divided by the noninstitutional civilian population over age 16
These terms and many more are described in detail by the BLS in “Labor Force Statistics from the Current Population Survey: Concepts and Definitions” which you can find here.
Understanding the intricacies of some of the key definitions is important. Even more important is monitoring the trends / “direction of travel” of these and other key jobs-related ratios.
Pandemic-related effects on the jobs market (and inflation)
The three key jobs reports released in the last week or so have increased investors’ confidence that inflation can be brought under control without badly affecting the jobs market. Recall that the Federal Reserve lowered the Federal Funds rate to effectively 0% at the onset of the pandemic and did not begin to tighten monetary policy until one year later in March 2021. Concurrently, trillions of US dollars were spent by the federal government in at least three separate stimulus plans to offset the effects of the pandemic-driven economic shutdown and its aftermath. The US economy began to first “adapt” to the pandemic, and only then moved beyond the worst , effectively into a mode of “living with COVID”.
In retrospect, many economists believe that unprecedented doses of both monetary and fiscal stimuli at levels never seen was simply too much, even though it was arguably instrumental in returning the US economy to sound footing. The combination of measures like near-0% borrowing costs (effectively free money), loan forbearance, and three rounds of direct stimulus checks to Americans, among a broad array of other fiscal stimulus measures directed towards individuals and businesses, fundamentally changed the labor market. Worker behavior changed as personal savings rose, increasing from $11.3 trillion in 1Q20 to $12.6 trillion by 1Q22 (source: Federal Reserve). “Work from home” became the new norm, and some workers even decided not to return to work at all after the lock-down (2Q20) ended. Some people suffered long-term complications from COVID (“long COVID”), others experienced psychological effects related to the pandemic, and others were close enough to retirement anyway that they said, “why bother?” Many of these distortions led to worker shortages that persist to this day, creating never-before seen stress in the jobs market even after the darkest days of the pandemic passed.
The effects of the pandemic on the jobs market data included:
A reduction in the labor force and the associated participation rate, since many potential workers left the workforce and stopped gainfully looking for work,
A sharp increase initially in the unemployment rate, which peaked in the early months of the pandemic during the economic lock-down. This was followed by a gradual improvement in this key metric caused by a combination of workers coming back on-line as the pandemic eased and the labor market size remaining depressed,
Supply-chain disruptions meant that critical key components of many manufactured products could not be made, disrupting the manufacture of end products globally leading to various shortages and price aberrations,
Pronounced negative effects at the beginning of the pandemic in most services jobs (as opposed to manufactured goods), which then over-shot on the upside as the economy reopened and certain service industries – like restaurants, leisure (entertainment, hotels, etc.) and travel (airlines, cruise ships) – boomed due to pent-up demand. This left many services sectors short of workers, and
The confluence of anomalies in the economy causing goods inflation initially, most of which eventually normalized (in line with inflation), followed by services inflation as a more troublesome wage-price spiral kicked in. This led to high and what has proven to be sticky core (ex-food, ex-energy) inflation, that is just recently starting to subside (although it remains well below the Fed-target of 2%/annum).
The messages in the most recent jobs report
The most recent jobs data suggests that the US jobs market is ever-so-slowly cooling, a welcome trajectory for the Federal Reserve.
The labor force is increasing because people that have not been looking for jobs are now starting to do so as pandemic-savings dwindle, increasing the labor participation rate,
The offshoot of more people looking for jobs is an increase in the unemployment rate. Even though the unemployment rate ticked up in August, the cause was not because employed people were losing their jobs, but rather because the ranks of unemployed people as defined by the BLS were increasing due to more people looking for jobs. Nonetheless, the unemployment rate (3.8%) remains near historical lows, as the graph below from FRED illustrates.
In support of this assertion, initial jobless claims are not increasing, at least not yet. After peaking at around 6.1 million weekly jobless claims early in the pandemic, the number of people seeking unemployment decreased sharply in the early months, falling below one million in August 2020. By November 2021, the figure had reached 250,000, and it has largely stayed between 200,000 and 250,000 per week since then.
Job openings are starting to gradually decrease, although the ratio of number of available jobs to unemployed workers remains at 1.39x, very high by historical norms. The graph below from FRED illustrates the level of job openings (per the “JOLTS” report, blue line) compared to the number of people that are classified as unemployed (red line).
This confluence of factors suggests that the jobs market is cooling off ever so slowly, although it remains robust vis-à-vis historical norms.
The key metrics over time
To provide more context with respect to the most recent data, the two tables below contain the three key metrics (the unemployment rate, the labor participation rate, and the ratio of job openings to unemployed workers) over various periods of time, as follows:
1980 to present: long-term period, including several recessions
2000 to present: medium-term period, includes early 2000s recession, the GFC and the pandemic period
2007-2009: The Great Recession period
2010-2020: the period between the GFC and the pandemic, a time that includes unconventional (easy) monetary policy
2018-2020: the last “normal” period prior to the pandemic
3/2020 to 3/2021: the first 12 months of the pandemic
4/21 to present: the period since the first year of the pandemic, and coincidently, the month following the first month (March 2021) that the Fed began to tighten monetary policy
It should be clear from these tables that unemployment remains near historically record-low levels, the labor participation rate is gradually improving (and is now above the three-year average prior to the pandemic), and initial jobless claims remain subdued. With inflation gradually coming down, this is a Goldilocks economy that is neither too hot nor too cold.
Time will tell whether the most recent jobs market data is an aberration, or if it represents the perfect trajectory towards normal. Concurrently with monitoring the jobs market, investors will be closely monitoring the upcoming inflation releases, as they game the next move by the Federal Reserve.