With job openings falling back to normal and the labor supply increasing, the labor market was in balance in July, an important reason for why the Federal Reserve in our view should have cut its policy rate in July.
The drop in job openings explained part of why job gains were unexpectedly low in July. Openings fell to 7.67 million from 7.91 million in the prior month. That translated into 1.1 job openings per unemployed worker, the lowest level since 2021.
The data raises some concerns about our call for a strong rebound in August job gains as demand for labor is cooling across many sectors and regions.
Risks to the downside are increasing ahead of the key jobs data coming out on Friday. The largest drops came from health care and from state and local government, posting a decline of 187,000 and 121,000 in openings, respectively.
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Friday’s jobs report will be one of the most consequential in a while. If the numbers look much weaker than the consensus, which is forecasting a sizable rebound, then there is a chance that the Fed will look for a super-sized 50 basis-point cut in September.
We think anything below 100,000 net jobs added and a higher unemployment rate should prompt a large rate cut.
This is a Fed that doesn’t want to see further deterioration in the labor market and is ready to act if necessary. The recent minutes of the July meeting implied so, with some members not against a July rate cut.
But that is still a high bar at the moment as we do not see a higher unemployment rate for August while job gains should remain above 150,000.
The reason is that hiring and layoff rates changed little in July, so even though job gains are slowing, layoffs are not high enough to require an emergency 50 basis-point rate cut. The hiring rate stayed at 3.5%, up from 3.3% the previous month, and the layoff rate rose to 1.1%, up from 1.0%.
While labor demand is down in most categories, firms with fewer than 10 employees—the smallest ones—are still struggling to fill openings. Job openings from this category remained high at around 1.5 million in July, compared to an average of 900,000 before the pandemic.
