In a sign that the chronically tight labor market may be easing, job openings plunged in August amid a slowdown in overall demand.
That decline should come as an encouraging sign for the Federal Reserve, which has been targeting excess labor demand with aggressive interest rate hikes as it tries to tame inflation.
The number of job openings has dropped by almost 2 million from the peak of 11.9 million in March—when the Fed’s first rate hike in this cycle took place—to 10.1 million in August, the Bureau of Labor Statistics reported on Tuesday.
August’s reading was also the lowest since June 2021, when labor shortages began to set in.
Still, any speculation on an interest rate pivot by the Federal Reserve remains premature, as job openings continued to be elevated compared to the five-year average of 6 million before the pandemic.
There were 1.7 jobs available for each unemployed worker in August as the gap between labor supply and demand remained significant.
The Beveridge curve
The report came out at a time when the market is trying to assess whether the Fed is increasing rates too aggressively.
At the heart of the debate lies the Beveridge curve, which presents the negative relationship between the job vacancy rate and unemployment rate. The intuition is this: As the job vacancy rate increases, there are more jobs available, helping to push down the unemployment rate. The opposite is also true.
August’s data supported the proponents of a more aggressive Fed, including us, who have been arguing that the current relationship showed by the Beveridge curve should be a lot steeper than in the past.
That means rate hikes should affect job vacancies a lot more than the unemployment rate, keeping the economy from descending into a deep recession.
While the unemployment rate has remained historically low in the 3.5% to 3.7% range since March, the job vacancy rate has dropped substantially from a high of 7.3% to 6.2% in August.
On top of that, hiring rates have been stable in the past five months, moving only in the 4.1% to 4.3% range as businesses kept adding more jobs. The hiring rate was unchanged in August at 4.1%.
The outlook
But that does not mean the economy won’t dip into a recession, although when it does it will most likely be a shallow one.
Our estimate shows that to get inflation down to 3% by the end of next year, the unemployment rate would have to rise to about 4.6% or 0.9 percentage points from the current level. That increase in the jobless rate should be equivalent to a mild recession.
Beneath the headline, the quit rate was also unchanged, staying at 2.7% on the month, mostly driven by quits from small firms with fewer than 50 employees.
On a six-month moving average, quit rates have rolled over hard for medium- and large-sized firms that have more than 50 employees. That highlights a tight labor market where outsized demand for labor from larger firms is providing workers more opportunities to switch jobs.
