The U.S. labor market is showing signs of cooling down after an exceptionally vigorous period post-pandemic. This shift is critical as the Federal Reserve approaches its inflation targets, making the direction of the jobs market pivotal for deciding when and how much to cut interest rates.
Monthly job growth remains robust, but it has slowed from the previous year’s average of over 250,000 new jobs per month. As of June 2024, the unemployment rate has ticked up to 4.1%, rising from a historic low of 3.4% in April 2023. This increase in unemployment reflects a broader trend of moderation in the labor market. Additionally, the number of unfilled job openings has been decreasing, layoffs have picked up, and wage growth—which plays a significant role in driving services inflation—has decelerated. Specifically, average hourly earnings rose by 3.9% year-over-year in June, a significant drop from nearly 6% in early 2022.
Jeff Schulze, head of economic and market strategy at ClearBridge Investments, commented on the situation, noting that “The labor market is no longer the significant source of inflationary pressure that it was.” While the job market remains solid, it no longer exhibits the overheating characteristics seen in previous months. The Federal Reserve, having focused on combating inflation through higher interest rates, is now paying more attention to its mandate to maximize employment. To achieve a smooth economic transition, the Fed is considering pre-emptive interest-rate cuts, potentially starting as soon as their September policy meeting. Fed Gov. Christopher Waller highlighted that labor supply and demand are more balanced today compared to the past few years, with moderate employment growth, wage increases aligning with price stability, and stable job vacancy and involuntary layoff rates.
Several indicators illustrate this labor market moderation. The ratio of job openings to job seekers, which was very high during the pandemic, has decreased. According to the Job Openings and Labor Turnover Survey (JOLTS), there were 8.1 million job openings as of the end of May, with a ratio of 1.3 unfilled positions per unemployed worker. This is a decrease from more than 2 at the end of 2022, reflecting that fewer employers are struggling to fill positions compared to a year ago, though there are still more job openings than available workers.
Another sign of moderation is the rising number of unemployment insurance claims. The four-week moving average of initial claims reached 235,500 by late July, up from just over 200,000 at the beginning of the year. Continuing claims also increased, holding near 1.9 million, the highest level since November 2021 and above 2019 levels. Although these claims data can be influenced by short-term factors, such as natural disasters, they are considered a leading indicator of labor market trends. The upward trend in claims suggests that labor market conditions are softening.
Long-term unemployment is also on the rise. As of June, approximately 1.5 million of the 7.2 million unemployed workers had been without a job for at least 27 weeks. This increase in long-term unemployment indicates that the labor market’s underlying health is weakening. Individuals who are out of work for extended periods often face difficulties in regaining employment and may reduce their spending, which could further impact the economy.
The June jobs report showed that U.S. nonfarm payrolls increased by 206,000, a healthy number but with notable sector-specific concentration. About 58% of these job gains were concentrated in healthcare and government sectors. Employment growth in the private sector was more modest, with only 136,000 new jobs added. The leisure and hospitality sector, which had added 333,000 jobs in the first half of the previous year, saw only about 100,000 net gains in the same period this year. Manufacturing jobs declined by 8,000, and retail jobs fell by 8,500. The temporary employment sector, which often reflects immediate labor market trends, experienced a significant contraction of 49,000 jobs in June, the largest monthly loss in the past two years. A decline in temporary employment is often an early warning sign of broader labor market weakness.
EY Chief Economist Gregory Daco observed that “The labor market has largely rebalanced from a demand-and-supply perspective.” Despite this, one of the most visible signs of labor market cooling is the rise in the unemployment rate. The rate increased to 4.1% in June, up from 4% in May and from a low of 3.4% in April 2023. This recent rise in unemployment nearly triggered the Sahm Rule recession indicator, which suggests a recession when the three-month moving average of the unemployment rate exceeds its low from the prior year by at least 0.5 percentage points. Claudia Sahm, the rule’s creator, noted that while part of the increase may be due to labor-force expansion, including immigration, there are also broader increases in unemployment that cannot be ignored.
U.S. Bank Chief Economist Beth Ann Bovino anticipates that the unemployment rate will continue to rise, though not dramatically. The Bureau of Labor Statistics (BLS) has significantly revised payroll data in recent months, reducing initial job gains estimates by about 250,000 over the past six months. For April and May, payroll estimates were revised down by a combined 111,000 jobs, making previous hiring trends appear weaker than initially reported. Such downward revisions are typically not indicative of a strong labor market and complicate the interpretation of labor trends.
If the labor market continues to cool at the current rate, the U.S. might see monthly job growth slowing to around 100,000 jobs before the end of the year, according to Dante DeAntonio of Moody’s Analytics. This cooling, while part of the natural adjustment from an overheated job market, will be a critical factor in the Federal Reserve’s decision-making regarding future interest rate adjustments.