This week we will see crucial evidence on the progress of the Federal Reserve’s campaign to loosen labor market conditions.
Federal Reserve Chairman Jerome Powell has described the labor market as severely unbalanced. His comments over the last few months have made it clear that he regards easing labor market tightness as a necessary condition for prevented inflation from becoming entrenched. The key measure of labor market tightness for Powell is the ratio of job vacancies to unemployed people.
On Wednesday, the Labor Department will release the Job Openings and Labor Turnover Survey (JOLTS) that will give us one-half of the ratio. Job openings rose to 10.717 million in the end-of-September figure, far more than expected. The data for the end of October is expected to show a decline to 10.5 million. In fact, the entire range of forecasts from analysts surveyed by Econoday is for a decline in job openings. That means that another rise would catch the market off-guard and likely send stocks plunging on the theory that “good news is bad news.”
We’ll also get data on quits on Wednesday. These voluntary separations are another key measure of labor market tightness. Workers tend to quit when they expect to easily find a better job, particularly one that offers better pay. And over the past year, those workers have been right. Job changers have seen much higher wage gains than workers who stayed put. This makes quits data extremely relevant to the question of whether rising wages will fuel sustained inflation.
As the chart above shows, quits have been extremely elevated since climbing above their prepandemic high in March of last year. They have been trending down for the past six or seven months. A continuation of this trend would probably be a welcome sign to investors and to the businesses who have been struggling to maintain their payrolls.
The other half of the key vacancies-to-unemployment ratio will be released on Friday. Payrolls are expected to grow by 200,000, and the unemployment rate is expected to hold steady at 3.7 percent. As a result, there is not much easing of labor market conditions expected in the nonfarm payrolls numbers. A bigger than expected jobs number, however, could push the level of unemployment back down, which would worsen the ratio.
The other critical piece of data in the Friday employment report will be average hourly wages. These are expected to rise 0.3 percent for the month, a slowdown from 0.4 percent in the prior month. A bigger increase will likely stir up fears that the Fed’s rate hikes will need to go further to bring down inflation.