This Friday, the Bureau of Labor Statistics (BLS) will release the July jobs report. While the labor market has been a pillar of strength in the recovery, signs of a weakening economy raise the question of when the rug might be pulled out from under the job market. July’s jobs report is likely to show ongoing but slowing job gains, but the economy and job market can’t be out of sync for too long. And softening economic indicators indicate that we may see the job market slowing through the end of the year.
Here are three trends we’ll be watching for in the July jobs report:
- Jobs growth to decelerate. Job gains have been slower but mostly flat since March. Job gains should continue to decelerate as the broader economy slows. If job gains slow, it’s likely they’ll hit the slowest rate of hiring since April 2021.
- Unemployment rate flat. The unemployment rate held at 3.6 percent in the last three months and is likely to stay flat in July. If so, that would likely continue a trend since April of employment gains in the household survey being weaker than the payroll survey.
- Watch for industries with slowing hiring. Real consumer spending has held up and hiring is likely to continue in retail and transportation & warehousing. Spending is still rising in the service industries, like leisure & hospitality, and they are likely to see robust job gains. While June did not show job losses in industries with prominent reports of layoffs and hiring freezes, in July, we are watching the information, financial activities and professional & business services industries.
The Case for Optimism in the Face of a Slowing Labor Market
The tight labor market of 2021 has been a formative memory for many employers. With employers still recovering from the chaos of the Great Resignation, businesses are particularly attuned to the costs of labor shortages and high attrition. As a result, they are likely to be more cautious in deciding to reduce headcounts. The optimistic case is that, in the face of a possible recession, employers will hoard labor, moderating the labor market impact of a slowing economy.
There’s a deep body of evidence in economics suggesting that business decision makers are “scarred” by major macroeconomic disruptions and anchor their future behaviors to these traumatic events. For example, in the aftermath of the late-2000s homebuilding crash, homebuilders spent the next decade cautiously avoiding over-expanding. A more recent analogy might be the failure of just-in-time supply chains during the pandemic: When the risks of longstanding just-in-time inventory management practices became a vulnerability in 2020, retailers and manufacturers quickly pivoted toward holding larger precautionary inventories. Just as with these examples, employers moving forward may rethink their relationship with their workers in order to preserve more buffer, benefitting American workers who will have more leverage in a more competitive labor market.
In Defense of Job Openings Data
Data from the BLS’s Job Openings and Labor Turnover Survey (JOLTS) continues to show job openings near record highs. Much hay has been made over whether the survey’s estimates of job openings are accurate given technological change and the lower cost for employers to post jobs and keep them open online, with debates predating the pandemic.
While these concerns may require putting an asterisk next to job openings figures from JOLTS, the holistic picture we see today is still of an extremely tight labor market. For example, we can compare the job opening rate and quits rate from the JOLTS survey, which have traditionally been linearly correlated. There isn’t a strong reason to believe that technology has changed our ability to measure the quits rate, so if we compare the quits and job openings rates today, we can see that elevated job openings are in line with elevated quits.
The relationship was steeper in the post-2001 and post-2008 recoveries, but not significantly so. Based on a rudimentary extrapolation of the post-2001 relationship, the elevated quits rate today would suggest that the job openings rate is about 5 percent today, not 7 percent. That’s a meaningful difference, but it would only drop total job openings from 11 million to 7.9 million, still higher than the pre-pandemic record high.
In sum, while we should be careful comparing job openings data from JOLTS over time due to technological change, it is still a good indicator of labor demand, and it’s still sending the signal that the job market remains hot as employers battle for workers.
Taken together, strong labor demand and labor hoarding by employers could suggest a surprisingly resilient labor market even in the face of recession. However, the last two years have taught us to be humble in attempting to extrapolate in an unprecedented environment. These trends that indicate resilience may also suggest that the labor market could be a lagging indicator in today’s slowdown. Employers have still not caught up to the staffing levels they need to meet consumer demand, and even a contraction in demand could leave room for ongoing jobs growth. Despite the debate over whether we’re nearing or already in a recession, the job market and economy we’re experiencing today are uncharted waters and our maps from past recessions may not be the best guide to the unique constellation of forces shaping the U.S. economy today.