Cooling Labor Markets Raise Questions About Economy

Looking at every bit of economic data as a form of divination has become a national pastime. When will the next reveal bring us to the heart of the Fed and the magic moment when they give up and cut rates?

But nothing is that certain, even for economists. On Friday, the June employment data comes out. Even that is only a first step because there are two sequential monthly chances for revisions, many of which recently have cut back on job creation in previous months.

The Dow Jones roundup of economists’ projections for Friday’s June job report expects 200,000 new jobs and an unemployment rate of 4.0%, the same as in May. Bloomberg’s survey of economists projects 190,000 new jobs with unemployment also at 4%. Both surveys expect year-over-year wage increases of 3.9%, which Bloomberg says is the smallest increase in three years and which would certainly be down from the 4.1% of May.

“Recent data including declining vacancies and higher weekly jobless claims underscore cooler-yet-resilient labor demand,” Bloomberg wrote. “Having more available workers to choose from is helping companies step back from the steep pay increases that had been a source of inflationary pressures over the past few years.”

Except that the real drivers of inflation weren’t pay increases so much as things like shelter, food, and energy. For many months, a lot of economists were sure that unemployment would have to spike before inflation would come down, pointing to a model called the Phillips curve, which historically sometimes has shown a correlation, which isn’t causality.

The Wall Street Journal reported that the labor market looked overheated during the pandemic. But it has cooled. “Job hiring and quitting rates are back to levels seen 10 and seven years ago, respectively, a sign fewer workers see the opportunity to jump to new, higher-paying jobs,” they wrote. “Yet layoff rates remain low, meaning employers aren’t trying to shed labor.”

Government data show the number of jobs per unemployed person has been sliding down from about 2.0 at the height of the pandemic to 1.24 in April 2024, approaching pre-pandemic figures. The question is whether current conditions are sustainable.

“This is what the economy looks like when it is at a sustainable simmer,” Ernie Tedeschi, a former Biden administration economist who is now at Yale University’s Budget Lab, told the Journal. “But because we spend very little time in our economic history close to or at full employment, there is a lot more uncertainty.”