Help (Still) Wanted

“This is a very strong labor market,” Jerome Powell said last week, addressing reporters following a second consecutive “unusually large” rate hike. “It doesn’t make sense that the economy would be in a recession.”

There are other (better, even) arguments to support the contention that “recession,” whatever it means, isn’t the right word if what you’re describing is US economic activity over the first and second quarters of 2022. On the NBER’s definition, it almost certainly isn’t the right word. Maybe it’ll be a better fit later this year. We’ll see.

A key pillar of any constructive take on the outlook is the notion that, as Powell put it, America still has “a very strong labor market.” Monthly job gains have been uniformly robust in 2022 and economists expect another solid report this week.

Assuming an in line print on July payrolls, The White House could (and surely would) take the opportunity to counter recession banter with boasts about three million “new” jobs created so far in 2022 (figure below).

There are any number of headline-revision permutations that could result in total nonfarm payroll employment rising back to February 2020 levels, a milestone the Biden administration would very much like to hit. Last week, following the advance read on Q2 GDP which suggested the economy met a commonly cited definition of recession during the second quarter, Joe Biden was quick to tout the recovery of all private sector jobs lost to the pandemic. He may soon have an opportunity to make a more unequivocal statement.

For the Fed, the strength of the labor market is a double-edged sword. On one hand, steady job gains provide air cover for the additional monetary tightening seen necessary to quell inflation. On the other hand, a key contributor to that same inflation is a tight labor market, where a dearth of available workers (and the enticing prospect of higher pay for switching jobs), continues to put upward pressure on wages. A key gauge of compensation followed closely by the Fed came in hotter than expected for Q2, data out last week showed. Several underlying measures of wages and salaries in the report set new records, even as inflation-adjusted pay remained deeply negative.

With the media awash in recession headlines and the bond market buying into the narrative (figuratively and literally), policymakers can ill afford any material deterioration in the labor market. That would fan recession fears, and depending on the severity, could compel STIRs to start removing rate hike premium from the December and November policy meetings. The Fed doesn’t want to be “done by Thanksgiving” absent compelling evidence that inflation is on a sustainable path lower.

“Given how politicized inflation has become this year, as well as the reality that, despite its relative independence, the Fed has demonstrated a willingness to fall in line with Washington’s collective battle with inflation, there is little chance that the Fed won’t hike in November,” BMO’s Ian Lyngen and Ben Jeffery said. “Even a ‘pedestrian’ quarter-point move needs to be penciled in due to the proximity of the meeting to the midterm elections,” they added, suggesting “it’s not until December that the prospects for a pause come into focus.” That, they wrote, is the backdrop for July’s jobs report, which should provide “additional confirmation of the strength of the labor market.”

At the same time — and this speaks to the vexing dichotomy — the only thing the Fed needs less than a sudden weakening in the labor market is too much labor strength and particularly evidence that wage growth is accelerating, not abating. That’d suggest no progress short circuiting a wage-price spiral which, official protestations notwithstanding, is plainly embedding itself in the economy.

Last week, Powell lamented the lack of improvement in the supply of labor. “There’s some evidence that labor demand may be” normalizing, he said. “Labor supply, not so much.” If you ask Goldman, substantial additional progress on recovering pre-COVID levels of labor force participation due to continued fading of pandemic-related factors isn’t likely.

“The participation rates of young and prime-age people have mostly recovered to pre-pandemic levels [and] labor force exits of older people, which have been driven both by early retirements and the natural aging of the population, seem unlikely to reverse,” the bank’s Jan Hatzius wrote, in a note dated July 29, adding that “the changing composition of the population will likely continue to subtract about 0.2pp/year from the LFPR over the next few years, primarily due to population aging.” Goldman lowered their projections for the participation rate (figures above).

The implication, Hatzius said, is that “most of the reduction in the jobs-workers gap needed to slow wage growth to a pace consistent with the Fed’s inflation goal will have to come from a reduction in labor demand rather than an increase in supply.” Goldman expects a decelerating economy will lead to “sharply” slower job growth in the second half and into 2023.

It’s with that in mind that market participants will closely eye June JOLTS data, due Tuesday. We’re now getting close to a point beyond which I’d expect to see job openings move lower, in line with myriad reports of corporate hiring freezes and layoffs. Ford plans to slash jobs (although management was reluctant to say how many and when), Microsoft’s hiring slowdown is now a fixture of the financial news cycle, while Google, Netflix, Meta and Lyft are among a bevy of other big-name US companies reassessing their staffing requirements. Jobless claims have moved higher of late.

I’ve repeatedly suggested that a big drop in headline JOLTS is likely at some point over the next several months. It’s possible this week’s figures (which will represent openings on the last business day of June) will mark a turning point, even if this probably isn’t the “big one,” so to speak. How any prospective decline in job openings would be received by markets at a time when investors are torn between a recession obsession and inflation hand-wringing is anyone’s guess.

Whatever the case, we’ll be able to update Powell’s favorite chart by the end of the week (figure below).

As a reminder, the Fed wants to cool the labor market without engineering a sharp rise in joblessness. Theoretically, that can be accomplished thanks to millions of unfilled positions, which policymakers hope to render superfluous. The less acute America’s labor shortage, the less upward pressure on wages. If wage growth cools, it’ll help bring down inflation. And not too many people need to actually lose a job for that to happen. So says theory.

Late last week, Christopher Waller attempted to refute the suggestion, as conveyed in a July 13 paper by Larry Summers and Olivier Blanchard, that a Beveridge curve analysis shows the “Fed’s hope that vacancies can be decreased without increasing unemployment flies in the face of historical empirical evidence.” Waller’s math, by contrast, suggests a soft landing for the labor market is possible. “Under most assumptions about current levels of matching efficiency and the curvature of the Beveridge curve, a decline in the vacancy rate from 7% to 4.6% would lead to an increase in the unemployment rate of about 1 percentage point or less,” he wrote, adding that such an increase “would put the unemployment rate at a level below 5%, which in historical terms is quite low and, in our view, consistent with a soft landing.”

The debate goes on. Suffice to say no one actually impacted by job losses (real or theoretical) cares about the Beveridge curve, underscoring an important point about the structure of society: The people for whom critical economic debates matter aren’t allowed to participate in the debates.

Also on deck this week: ISM (which will be watched closely for confirmation of the dour message conveyed by flash reads on S&P Global’s PMIs, final versions of which will be released this week too), consumer credit, Treasury’s refunding announcement and a handful of Fed speakers, including Bullard and Mester.