The writer is chief investment strategist at Charles Schwab
It is often said that a key risk in a monetary policy tightening cycle is that the Federal Reserve raises interest rates until something “breaks”. That raises questions about how far the Fed will now go to tackle rising inflation.
Part of the reason cited for the current central bank aggressiveness is the strength of the US job market and the potential it can contribute to inflation.
But a look under the hood highlights that there may already be a rift in the labor market, which is not being picked up by traditional key indicators – including wage growth and the unemployment rate.
The “establishment survey” generates the top salary number each month when the Bureau of Labor Statistics releases its U.S. employment data. According to that survey, 315,000 jobs were added in August, which was a lot, but much lower than the 526,000 the previous month. Counting payrolls, of course, only provides an estimate of the number of jobs created; it does not measure unemployment.
That’s where the US Household Survey comes in, which calculates the unemployment rate. It’s a survey of household members, so it counts people, and whether they’re employed or not.
A recent trend picked up by the household survey is the increase in multiple job holders. If one person picks up a second or (God forbid) third job for economic reasons, that still counts as one worker per household. However, it is possible that those extra jobs will be picked up as individual salary tasks within the location survey.
An additional sign of underlying cracks in the labor market is the declining number of full-time jobs and the very strong increase in part-time work. The 442,000 job gains in the household survey in August seemed substantial at first glance. But that was more than just at the expense of part-time workers, with full-time jobs even shrinking by 242,000. It was the third straight month of declines, totaling 465,000 over that period.
Another fly in the ointment of labor market statistics is associated with job openings – the most common tracker from the Job Openings and Labor Turnover Survey (Jolts). An important measure of the tightness in the labor market was the relationship between vacancies and the number of unemployed; the former surpassing the latter by a ratio of 2.0 to one.
The problem is that the Jolts statistics arguably overestimate the number of actual individual job openings. One of the criteria for a vacancy is that there is “active recruitment” of employees by an establishment. That could be advertising, internet announcements, signage, word of mouth, contacting employment agencies, or setting up a job fair or similar source of potential applicants.
Moreover, the pool of labor available for those jobs includes more than just individuals who are unemployed. Potential job changers, included in the workforce, should also be considered potentially competitive for those job openings. This suggests that the job market may be less tight than conventionally believed, as confirmed by recent research from the St. Louis Fed.
The Fed has explicitly stated that its goal is to weaken job openings without a significant rise in the unemployment rate – a narrow opening in the needle it is trying to thread. But the Fed also points to the need for more moderate wage growth, which is higher by historical standards but below inflation. This means that real wage growth is still negative.
There is another reflection of the declining demand for labor and that is the number of hours per week that companies demand from their employees.
Despite the healthy reading of wage growth in August, there was another reduction in the workweek, which was flat or low in five of the six months through August. At 34.5 hours, it is the lowest reading since April 2020, when the pandemic lockdown was in full effect. The decrease in the number of hours worked was so great that it resulted in the first decrease this year in the index of the total number of hours worked.
With labor being the top input cost for many companies and weak economic growth and demand, signs of weakness in the labor market are likely to foreshadow further deterioration ahead. As the Fed has pointed out, it may be a necessary ingredient in the quest to quell the rise in inflation.