Data, however, doesn’t mince words.
“There is a gradual realization that the rose-shaded glasses view of being able to reduce labor market tightness by just curbing the number of job openings is gone,” said Gregory Daco, chief economist at EY-Parthenon. “We have now an implicit realization that in order to cool the labor market there will need to be a significant increase in the unemployment rate and there will need to be a cooling of employment growth with potential employment losses.”
Those numbers could go south relatively quickly, Daco said.
“I wouldn’t be surprised that in an environment where businesses are being more cautious and are applying more discretion to their hiring decisions, that we could see potential net job losses by the end of the year,” he said.
“The average workweek in manufacturing contracted in four of the last six months — a notable sign, as firms reduce hours before reducing their workforce,” Ozyildirim said in a statement. “Economic activity will continue slowing more broadly throughout the US economy and is likely to contract. A major driver of this slowdown has been the Federal Reserve’s rapid tightening of monetary policy to counter inflationary pressures.”
Myriad factors at play
The Fed can’t just “click its heels three times, raise rates and have inflation drop,” Frick said.
“There’s a myriad of factors going on now, and it’s a mistake to think the Fed controls any more than a handful of those,” he said.
“I think the Fed is mistaken if it thinks raising rates, even to 4% or above, is going to cower the labor market, because we’re still more than 4 million jobs below the pre-pandemic trend, and employers are still making money, and employers still have to hire people,” Frick said. “And it’s really, at this point, like telling the tide not to come in — to expect the labor market to soften.”
A key reason Fed Chair Jerome Powell wants more slack in the labor market is out of concern that a tight employment situation will continue to push up wages, which could then keep inflation elevated. As the unemployment rate rises, workers lose bargaining power for higher wages and households pull back on spending.
“Powell has said that wage increases contributing to inflation has not yet occurred, but he sees it happening in the future,” Frick said. “This is all very theoretical at this point. And I understand that if you want to decrease demand, a way to do it is to increase unemployment … but I really think it’s an open question whether it’s an issue now or not.”
No ‘painless’ path forward
To that end, American workers might have to bear the brunt of the pain for a problem that’s not caused by them.
“It’s unfair,” Frick said. “But no one ever said economics wasn’t sometimes cruel.”
“That’s a very slow level of growth, and it could give rise to increases in unemployment, but I think that is something that we think we need to have,” Powell said. “We think we need to have softer labor market conditions as well. We’re never going to say that there are too many people working, but the real point is this: Inflation, what we hear from people when we meet with them is that they really are suffering from inflation.”
“If we want to set ourselves up, light the way to another period of a very strong labor market, we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t,” he added .
The next batch of key employment data, including openings, layoffs, and monthly job gains, will come in the first week of October when the Bureau of Labor Statistics releases the Job Openings and Labor Turnover Survey and monthly jobs report for September.
Jobless claims data released Thursday showed that the number of first-time applications for unemployment benefits was 213,000 for the week ended September 17, according to the Department of Labor. The previous week’s total of 213,000 was revised downward by 5,000. The weekly claims, which remain near some of their lowest levels in months, underscore how employers are holding on tightly to workers as the labor market remains full of opportunities for job hunters.