JOLTS: Hot Wages, Slow Jobs Growth

By admin_45 in Blog

Fed Funds Futures have grown more aggressive in discounting +5 rate hikes this year and the Job Openings and Labor Turnover Survey (JOLTS) out today helps explain why. The difference between job openings versus unemployed workers continues to widen to unprecedented levels. Fed Chair Powell highlighted this imbalance when describing the US labor market as being at maximum employment during his press conference last week.

Here is the data:

• There used to always be more unemployed Americans than jobs available in every month from December 2000 (start of JOLTS series) through January 2018.
• This trend reversed with openings surpassing unemployed workers each month from March 2018 through February 2020, or right before lockdowns and subsequent mass layoffs.
• It took until May 2021 for open positions to once again outnumber those unemployed, but this gap keeps widening to new records.
• There was an all-time high of 4.6 million more job openings than unemployed Americans in December 2021 (latest available data from JOLTS). To put that figure into context, it’s 3.3 million more than in February 2020, or when the US labor market was especially strong at the end of the last economic cycle.

Takeaway: this dynamic may reflect strong corporate confidence in economic conditions, but as much as employers are eager to hire they also face increasingly fierce competition for talent. The growth in hiring has therefore not kept pace with job openings. For example:

• Hires as a percentage of the labor force has been rolling over since June 2021 (from 4.2 pct then to 3.9 pct in December 2021).
• By contrast, job openings as a percentage of the labor force was 6.7 pct this past December, the third highest level of all-time. The record was 6.9 pct in July 2021.

Not only do these datapoints exemplify employers’ difficulty finding workers, but also shows openings can go higher still.

Now, moving on to another key feature of the current US labor market that speaks to Chair Powell’s assessment that it is particularly overheated: Americans are quitting their jobs at near-record levels. For example:

• Our “Take this job and shove it” indicator – or quits to total separations – came in at 73.5 pct in December, an all-time high.
• Quits as a percentage of the labor force was 2.7 pct in December 2021, the third highest level ever. The record high was 2.8 pct in November 2021.
• Layoffs and discharges as a percentage of the labor force was 0.72 pct in December, a record low.

Takeaway: workers are as confident as ever that they can find better job opportunities than their current roles. The quits rate is a major reason why the JOLTS report was reportedly Treasury Secretary Janet Yellen’s preferred measure of the US labor market when she was Fed Chair. People do not usually voluntarily leave their jobs until they have a more advantageous (and likely better paying) offer lined up.

Put our first (openings > unemployed workers) and second (near record quits) points together, and it creates the perfect storm for wage inflation. Here is the latest data on this front from the Atlanta Fed Wage Growth Tracker:

• The 3-month moving average of median wage growth based on hourly data was +4.5 pct in December 2021 (latest available data).
• The current rate is higher than the peaks of the last 2 cycles: +4.4 pct (2007) and +3.9 pct (2016). The all-time high was +5.4 pct in 1998 (series started in 1997).

Takeaway: wages – using the Atlanta Fed’s measure – are quickly accelerating and experiencing the fastest growth since March 2002. Employers’ outsized difficulty attracting and retaining workers will continue putting upward pressure on wages.

Bottom line (1): with the US labor market firing on all cylinders, Chair Powell is acutely focused on combatting rising inflation which means a more hawkish Fed, as he’s signaled. Wage growth should continue to rise due to the low supply of labor and high level of quits. That also supports the case for structural inflation given that wage growth far exceeds productivity growth.

Bottom line (2): elevated job openings reflect strong corporate confidence in earnings power. That’s a positive signal for US equities as companies wouldn’t seek out workers this aggressively if they did not think it was justified by robust consumer demand. Yes, companies are paying higher wages, but they can pass that through to US consumers who are also in a better position to afford rising prices on end goods.

Bottom line (3): employers’ struggle with finding qualified workers likely means the US is in a slower growth labor market going forward. December’s nonfarm payrolls figure (+199k) missed expectations by a wide margin, while wages (+4.7 pct y/y) increased more than expected. The labor market environment has not changed since, so we expect a similar dynamic in this Friday’s jobs report.