Job openings and factory orders came in lower than expected on Tuesday, continuing to show signs of softening economic demand that should work in the Federal Reserve’s favor in fighting inflation.
When the new data is combined with softer economic data released recently, the risk of a recession in the second half of the year in our base case has been rising.
We believe the Fed should and will pause its rate increases this summer to assess the full impact of its restrictive policy on the economy.
There were 9.9 million job openings in February, down from 10.5 million in the prior month, the Labor Department reported. That was equivalent to 1.67 openings for every unemployed worker. February’s number was almost 1.9.
Job openings, a proxy for labor demand, has been one of the Federal Reserve’s top targets.
While the downside surprise was a welcome sign for the Fed, there remained a substantial gap between demand and supply of labor compared to the firm labor market pre-pandemic. There were only around 1.2 job vacancies for each unemployed worker in 2019, before the pandemic.
If our forecast of a recession holds true in the second half of the year, we should expect sharper declines in labor demand, followed by more layoffs and a higher unemployment rate.
But until then, labor demand will continue to outweigh supply as the economy is poised to add more jobs. Our forecast for March’s payroll number had been 220,000 before Tuesday’s data came out. The cooler-than-expected data should add more downside risks to our forecast.
Vacancies declined in most categories, led by professional and business services, education and health care, trade, transportation, and utilities. Construction was one of a few categories that needed more labor in February.
Inside the job openings report, the hiring rate inched down by 0.1 percentage point to 4.0% on the month, remaining quite stable.
Still, layoffs fell in February to 1.5 million from 1.7 million previously, while the quit rate inched up again to 2.6% from 2.5%.
There might still hope for a “soft-ish” landing
With the release of the job openings data, we now have a better picture of the Beveridge curve, which show the relationship between the job vacancy rate and unemployment rate.
The curve shifted outward significantly during the pandemic, suggesting a structural change in the labor market featuring low supply and high demand.
The curve, however, has slowly moved back toward its pre-pandemic starting point as the unemployment rate has remained low while the vacancy rate has dropped. That is the scenario that many who are hoping for a so-called soft landing are looking at.
While there are chances that we might avoid a recession, or a hard landing, we think the chances are slim given the stickiness of inflation and the recent financial turmoil.
A middle course, or a “soft-ish” landing where a mild recession takes place, with a 1 to 1.5 percentage-point increase in the unemployment rate while the vacancy rate drops further, would be a lot more possible.
Factory orders
In a separate report from the Census Bureau, orders for manufactured and industrial goods dropped by 0.7% in February. January’s number was revised downward to a 2.1% decline from a 1.6% decline.
Excluding the volatile transportation component, orders still declined by 0.3% on the month.
The data came out amid increasing signs of a recession within the manufacturing sector in recent months. Key indicators such as our RSM US Manufacturing Outlook Index, the ISM manufacturing index and durable goods orders have all shown continuing weakness.
The manufacturing jobs data that will be released on Friday will certainly be another key indicator to see whether a manufacturing recession is under way. There were 4,000 fewer jobs for the sector in February.
