The U.S. labor market has been the economy’s most solid pillar over the past several quarters, with an average of 314,000 jobs created each month in 2023, even as other areas substantially slowed. Initial prints for the last 14 monthly non-farm payroll releases surpassed consensus expectations, the longest run of consecutive beats in at least 25 years.
Despite this resilience, a higher trend in initial jobless claims may be the canary in the coal mine.
Headline labor market strength is obscuring weakening trends for U.S. employment and consumption, with rising initial jobless claims the most serious signal of potential trouble ahead. Higher income cohorts are increasingly filing claims, an atypical shift that could portend a larger-than-expected drop in consumer spending in the back half of the year.
Because they tend to be volatile in a given week, initial jobless claims are evaluated on a four-week moving average basis. While the trend in claims over the past three months appears to support a shift toward a higher level, a substantial change in who is filing claims is more telling.
An increasing share of claims is coming from the middle- and upper-income cohorts, while lower-income claims declined. This is an atypical dynamic but not out of sync with headline job losses concentrated in the typically higher-paying technology and financial sectors.
Cracks beneath the surface are apparent in other labor market data.
In its most recent release, the Job Openings and Labor Turnover (JOLTs) survey showed improvement in the headline job openings figure, indicating improving labor demand.
However, the survey’s quits rate, measuring how many workers leave jobs (another way of viewing labor market health since most workers only quit for new jobs) fell back from the very high end of the pre-pandemic range. The labor market may be cooling to more normal levels.
Fewer workers quitting is consistent with deteriorating sentiment in the Conference Board’s Consumer Confidence survey. Last month it worsened as the share of workers reporting jobs were plentiful fell, while those reporting jobs were hard to get rose modestly. This trend continues.
Although overall payroll gains have remained strong since peaking in early 2021, hours worked have steadily fallen. This is typical as the economy enters a recession, with declining demand forcing employers to cut shifts. Hours worked have slipped below the average level of the last expansion and show no sign of stabilizing.
This, coupled with a surge in hiring, could indicate labor hoarding; businesses may be reluctant to reduce headcount after the hiring difficulties of recent years. It may be only a matter of time before profitability pressures lead to cost-cutting measures, including layoffs.
Indeed, layoffs may be the best tonic to calm an inflation weary U.S. Federal Reserve. Wages remain stubbornly high, with average hourly earnings running above 4% for all workers and at 5% for production and non-supervisory workers, accounting for about 80% of U.S. employment. Alternate wage measures like the Fed’s preferred Employment Cost Index and the Atlanta Fed’s Wage Growth Tracker are at similarly elevated levels, inconsistent with 2% inflation.
With only modest progress toward loosening labor pressures, the Fed likely will maintain interest rates higher for longer than financial markets have priced in. Inflation has slowed but remains far too high for comfort. Slowing the labor market to reduce wage gains (and thus consumption) will take time, but it ultimately should help bring inflation back down to the Fed’s 2% target. More work is needed to tame price pressures, but progress is being made.
Jeffrey Schulze, CFA, is Director, Head of Economic and Market Strategy at ClearBridge Investments, a subsidiary of Franklin Templeton. His predictions are not intended to be relied upon as a forecast of actual future events or performance or investment advice. Past performance is no guarantee of future returns.
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