Job Openings Crushed But Labor Market Still Tight

Jacob Hess

October 04, 2022

• Employment
• Rates

Job openings crashed in August as noted in the most recent version of the colloquially named JOLTS report. Openings had been hovering around record highs since the end of last year following the meteoric post-pandemic rise, and it seemed that the labor market was able to avoid damage from the first round of rate cuts. In reality, labor demand had just been holding on through the summer, and August’s crash is a signal that it is starting to unwind.

The number of nonfarm job openings fell a record-setting -1.1 million to just above 10.0 million in August, the decline was topped only by the pandemic-fueled decline of -1.2 million set in April 2020. The largest loss in openings was seen in social assistance (-236,000), other services (-183,000), and retail (-143,000) but declines were also significant in manufacturing (-115,000), finance & real estate (-77,000), professional & business services (-119,000), and leisure & hospitality (-111,000). There were very few industries that saw increases, and in those industries, the increases were small.

Outside of openings, the JOLTS report was pretty much a non-event. Total hires increased by 39,000, and total separations increased by a slightly more significant 182,000. The growth in separations was caused by a 100,000 swell in quits which had been falling since the beginning of the summer. The quiet moves in hires and separations suggest that the reduction in job openings was a result of firms deferring plans to hire rather than terminating existing employment. In fact, based on the slight differential of about 150,000 separations over hires, one would expect job openings to increase if firms’ labor demand hadn’t shifted.

There may have been some indication of this coming in the regional PMIs future employment indexes. The New York Fed, Philadelphia Fed, and Dallas Fed have all reported declines in the Future Employment Diffusion Indexes over the course of 2022 through the end of summer. The same trend can be seen in the NFIB’s Small Business Hiring Plans index. While the declines have been substantial, the actual index readings are still positive and point to an expected expansion of employment. However, the pace of that expansion has slowed significantly. Similarly, the number of job openings did fall significantly in August, but the resulting level is still well above the norm and indicative of an overly tight labor market.

How do we know we are still in an overly tight labor market? One can look at the spread between the job openings rate and the near-term real rate of interest as calculated using the two-year Treasury yield and the core PCE price index. Rising rates and the August blow to the job openings rate have put the spread at 7.9%, much lower than its peak of 11.5% in December 2021, but it is still well above the stable range of 4-5% seen in the period before the pandemic and after the financial crisis of 2008 (it’s also much higher than the peak of 2.9% set before the financial crisis of 2008).

What does this mean? There will likely be movement in one or more of the indicators affecting the spread to cause it to revert towards the pre-pandemic mean such as 1) labor demand will extend its new decline and the job openings rate will normalize, 2) the Fed will continue to raise rates which will lead short-term interest rates higher, or 3) inflation will peak and start to ease. The Fed’s hawkishness has been priced into yields sharply over the summer, and inflation appears to be stickier after the upside surprise in the August CPI report. Therefore, that leaves some deflation in job openings and labor demand to be the main force narrowing the spread.