The labor market continued to cool at an encouraging pace as elevated interest rates weighed further on overall demand. Job openings fell to 8.06 million in April from a downwardly revised 8.36 million in the previous month, according to data released by the Bureau of Labor Statistics on Tuesday.
The drop in vacancies was broad-based except for seasonal categories like retail trade. Health care, manufacturing and leisure were the notable categories that contributed to the drop. However, with hiring remaining strong, falling job openings have been working just as the Fed intended when it raised rates to multi-decade highs last year.
Quit rates, our preferred metric for labor market tightness, have fully normalized for about three quarters now, staying at 2.2% in April. For context, the lowest level of quit rates in 2019 was 2.3%.
While there is some room for openings to drop further to reach the 2019 level, we think the margin of policy error in terms of keeping the labor market strong is much larger now.
The current labor market is closest to normalization than it has ever been in the past three years. Moreover, most of the extra gap in openings has come from smallest firms with fewer than 50 employees, which are often more volatile and less indicative of the underlying tightness of the labor market. Thus, we don’t see too many reasons for the Fed to resist lowering rates this year.
We continue to advocate for a forward-looking central bank that is less dependent on backward-looking data to make policy decisions. Inflation is within a manageable range between 2.5% and 3% and will continue to edge further down once housing disinflation shows up this summer. We think the Fed should lower its policy rate sooner rather than later.
