Economists and some Federal Reserve officials are increasingly concerned that challenges may be looming for American workers as signs emerge that the labor market is losing momentum.
This year, companies have been posting fewer job openings, and employees are quitting less often. Unemployment has also started to rise from historically low levels, indicating an end to the tight labor conditions that marked the rapid recovery from the pandemic shock.
So far, robust hiring has helped the economy withstand aggressive Fed tightening, which has pushed interest rates to their highest levels in two decades. However, with inflation still above the central bank’s 2% target, there is fear that any further weakening of labor conditions could snowball and jeopardize economic growth.
“Any change in the outlook for the labor market could have significant implications for the direction of the economy and monetary policy,” said Rubeela Farooqi, chief US economist at High Frequency Economics. “If there is one thing we know for sure, it is that conditions change very quickly.”
Two key reports this week from the Bureau of Labor Statistics — Tuesday’s monthly update on job openings and Friday’s broader employment trends — will offer more insights into the labor market’s trajectory.
Last month’s Job Openings and Labor Turnover Survey (JOLTS) showed that total listings for open positions fell to 8.1 million in April, a three-year low. This figure is down more than a third from the peak of 12.2 million in 2022, when employers, struggling with labor shortages, tried to keep up with a surge in demand as the economy reopened.
Currently, there are 1.2 job postings for each person looking for work, similar to pre-pandemic levels. The quits rate, at 2.2% in April, has also returned to pre-Covid levels.
Kelly Bonn, a headhunter and executive coach in St. Petersburg, Florida, noted that inquiries from job seekers have increased by about 30% since the end of 2023. Finding a job can now take two to five months, compared to one or two months in 2021 and 2022, according to Bonn. “Employers are definitely taking their time and being choosier about who they bring in,” she said. Additionally, those with jobs are more cautious about leaving stable positions for new opportunities: “They don’t want to be unemployed in this market.”
Fed officials remain generally optimistic about the labor market but are beginning to acknowledge rising risks. “Overall, we’re looking at what is still a very strong labor market, but not the superheated labor market of two years ago or even one year ago,” Fed Chair Jerome Powell said on June 12, after the central bank kept rates unchanged and reduced projections for cuts in 2024.
‘Inflection Point’
Some economists now question whether the labor market is more vulnerable to a downturn. Goldman Sachs Chief Economist Jan Hatzius recently described it as at a potential “inflection point,” where a further significant softening in demand for workers will lead to higher unemployment, not just fewer openings.
“Future labor market slowing could translate into higher unemployment, as firms need to adjust not just vacancies but actual jobs,” San Francisco Fed chief Mary Daly said in a June 24 speech. “At this point, inflation is not the only risk we face.”
Monitoring the job market for a potential tipping point has become more challenging recently, with different indicators in the monthly BLS report on hiring sending conflicting signals. On one hand, data shows employers have added an average of 248,000 jobs per month this year, exceeding economists’ expectations, possibly driven by a surge in immigration. However, the unemployment rate — derived from a survey of households instead of businesses — rose to 4% in May, up from a low of 3.4% last year.
“We’re left with ambiguous results and we have to deal with that uncertainty around data,” Powell said on June 12.
Making this moment critical for the Fed is the awareness that labor-market losses can escalate quickly once they start. Unemployment rose gradually from 4.4% in March 2007 to 5.1% a year later, as the economy slowed amid the onset of the financial crisis. As the recession took hold, the jobless rate rose more rapidly, reaching 7.3% by the end of 2008 before peaking at 10% the following year.
So far, hiring and wage growth have remained steady. However, the backdrop has clearly shifted. One sign of this shift: Employers have largely stopped offering the substantial incentives they were providing to attract new hires in recent years, said Becky Frankiewicz, North America president at ManpowerGroup, a staffing services company.
“It was almost like, what can we do with the workers to get their attention?” Frankiewicz said. “All of that has really stabilized. Now it’s much more back to base pay.”
