Poor PMI data weigh on soft landing narrative
The labour market has been the most stubborn part of the economy in reacting to central banks’ efforts to tame inflation. In a way this is not a surprise as labour markets tend to lag behind other more interest rate sensitive markets such as housing, but nevertheless, progress has to be seen at some stage if central banks are to pause and/or finish with their hiking cycles.
Yesterday, the US Bureau of Labour Statistics released their monthly Job Openings and Labor Turnover Survey (“JOLTS”). The report showed steady progress in the labour market with evidence of some indicators reaching pre-pandemic levels for the first time in this cycle; job openings at 8.8m were significantly below expectations of 9.5m, whilst last month’s 9.58m figure was revised down to 9.16m. Although pre-pandemic this number was in the 7m-7.5m range it would be foolish to dismiss the progress from the 12m peak reached in March 2022.
The ‘Quits ratio’, which measures the proportion of employees that voluntarily leave their jobs in a given month divided by total employment, fell to 2.3%. This is one of the first labour market data points that has fallen to pre-pandemic levels; in other words, a Quits ratio of 2.3% is considered to be “normal”. The read across for the macro picture is the fact that there are less people willing to voluntarily quit their jobs - evidence that workers have less bargaining power as the imbalance between supply and demand eases. This, combined with the fact job openings are also falling gives us (and central banks) hope that wage increases will continue to moderate going forward.
Lastly, it is worth mentioning that these numbers show labour markets softening at the margin, while the unemployment rate is still very low and people in employment is at an all time high. In other words, the Fed’s projection of labour markets easing while not experiencing a major disruption seems to be slowly but surely making its way into real macro data.
While there is still a long road ahead in terms of labour market adjustments, it is fair to say that progress is becoming clearer – and the light at the end of the hiking tunnel looks to be in sight.