Job openings in March plunged to 8.49 million, the lowest level in three years, according to the Bureau of Labor Statistics on Wednesday. The drop was in line with our forecast that pointed to a cooling labor market where the imbalance between labor demand and supply is narrowing.
Our two preferred metrics for labor market tightness—the vacancies-to-unemployed ratio and the quit rate—both inched down in March, implying less pressure from wage inflation that is solely affected by supply and demand mismatches.
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The vacancies-to-unemployed ratio was 1.32 in March, reaching closer to the pre-pandemic average of 1.2, while the quit rate fell to 2.1%, which is fully normalized to the pre-pandemic level.
The job openings data offered some perspective on the 4% increase in the employment cost index reported on Tuesday that caused a financial market reaction. That increase can now be attributed less to labor churns, and more to productivity increases.
Wage growth, according to our rule of thumb, is the combination of inflation expectation and productivity growth. Inflation expectations have been anchored around 2% to 2.5% for some time now. That means productivity growth should also be around a solid 1.5% to 2%.
The composition of wage growth amplifies how difficult the Federal Reserve’s job has become in recent months as it tries to identify what is keeping inflation elevated. We think the job openings data suggests that core service inflation, which is heavily affected by labor costs, will most likely cool down in the next couple of months.
When considered with the recent drop in oil prices, and with housing price pressures poised to cool this summer, we would not be surprised if the Fed shifts its current hawkish stance to a more dovish tone.
ISM manufacturing
In a separate report on Wednesday, the ISM manufacturing index edged down in April, driven by slower production activity and new orders. One of the most watched subindexes, prices paid, rose sharply as expected. Not only did it reflect the recent rebound in inflation but might also foreshadow another strong inflation print for manufacturing goods in April.
Manufacturing employment sentiment stayed underwater for the seventh month in a row, in line with our forecast of little to no change in the sector’s job gains in April.
Given weaker data on jobs from both reports, we are comfortable with our forecast of a 240,000 increase in payroll employment in April, down from 303,000 in March, when the jobs report is released on Friday. Such an increase would still be strong compared to historical standards.
