Written by: Jordan Jackson
The Job Openings and Labor Turnover Survey (JOLTS) report for August suggests the labor market may be heading back to a more balanced state. Job openings fell by 1.1 million to 10 million, the fastest one month decline since April 2020. While this may be concerning for investors regarding the health of the labor market, this is a welcome development for the Federal Reserve as it signals its aggressive rate hiking campaign is helping to bring the labor market, and in particular labor demand, back to more normal levels.
Chairman Powell has often referred to the ratio of job openings to job seekers as uncomfortably high and the roughly two job openings per job seeker as unsustainable. This dynamic has pushed the unemployment rate to multi-decade lows and nominal wage increases to levels not seen since the early ‘80s. That said, focusing on the headline number can mask the underlying trends across industries.
As shown in the chart, coming out of the pandemic, demand for labor was the strongest among high-quality and service-based jobs. At its peak earlier this year, industries like professional and business services, education and healthcare, financial services and information technology were seeing the strongest demand for labor with greater than four available jobs for every one unemployed person. On the other hand, trade, construction, and manufacturing industries peaked at roughly 1.5 job openings for every unemployed person.
Due to the pandemic, jobs among service-based industries were decimated while the manufacturing sector held up a bit better. Moreover, on the supply side, early retirements, a collapse in immigrant visas, and prime-age working women stepping out of the labor force for child-care reasons, provided a chronic shortage of labor supply. While some of that lost supply has returned, thanks in part to higher wages, it may be that companies are growing frustrated with the lack of available qualified workers and facing a weakening in consumer demand, are reducing the number of open roles or implementing hiring freezes.
For investors, while it may seem reasonable to assume a fall in job openings would precede an uptick in the unemployment rate, the still huge gap between labor demand and supply suggests that job openings can come down further without meaningfully pushing up the unemployment rate. Eventually, lower openings will lead to slower job growth, but this may not take effect for some time as filling the current backlog of job openings will require many more months of solid job gains.
Altogether, with jobless claims continuing to run at very low levels and wage growth remaining elevated, the Fed is likely to continue to hike rates into next year as they feel more work is needed to both bring down inflation and the demand for labor.
Industries that had the strongest demand for labor emerging from the pandemic seeing biggest cuts to job openings
Ratio of job openings to unemployed persons by industry, peak level since April 2020 vs. August 2022
Source: Bureau of Labor Statistics, J.P. Morgan Asset Management, Haver Analytics. Data are as of October 3, 2022.