|Economists rely on many data points for insight into how the economy is faring, as each on its own can at times offer confusing signals, especially at turning points.
For example, for many months, most data have pointed to a labor market that remains remarkably robust. At the same time, however, the overall economy is cooling as higher interest rates have weighed on equity and bond prices, inflation-adjusted consumer spending has flatlined, and construction and manufacturing activity is slowing. How can the inconsistency between the dimming health of the economy and the still-resilient performance of the labor market be explained?
In truth, clues are beginning to emerge of a softening labor market. Firms added 223,000 jobs in December, according to the Bureau of Labor Statistics , the lowest number since December 2020, when job growth was negative. The three-month moving average of job gains is now at its lowest point since June of 2020, a visible sign of slowing.
By far, education and health services added the most jobs among the major sectors in December, with payrolls up by 78,000. But this supersector tends to be anticyclical, which means it could well keep adding workers even during a downturn. Medical firms are making up for lost ground, as hiring in the early days of the pandemic was difficult during those challenging conditions and did not keep up with long-run growth and the demands of an aging population. The sector has recovered all workers lost since March 2020.
The same cannot be said yet for leisure and hospitality, which includes hotels, bars and restaurants, and arts and entertainment, and which despite adding 67,300 positions in December is still 930,000 people short of pre-pandemic staffing levels.
In one clear sign that the labor market is softening, temporary positions (in the administrative services sector) were cut by 35,000 in December. A reduction in temp workers often signals that other layoffs are coming, as firms will cancel short-term jobs before having to let permanent workers go.
Another sign of a cooling labor market was the deceleration of wage growth in December. Average hourly earnings grew by just 0.3% — their slowest rate since last February. This indicator is closely watched by markets and by the Federal Reserve, as strong wage growth generally pushes firms to raise prices to cover higher staffing costs, leading to accelerating inflation — which the Fed will want to guard against.
One lingering disconnect in the labor market is the number of job openings, a labor market indicator that the Federal Reserve uses as a measure of demand for workers.
The number of openings was 10.5 million at the end of November, far higher than the pre-pandemic high of 7.6 million in November 2018. Job openings measure the number of jobs firms are actively looking to fill within the next 30 days, where “active” includes a printed or electronic listing, a help wanted sign, or word of mouth. The data comes from a survey of 21,000 establishments, a far smaller sample than the 600,000 establishments included in the monthly jobs report which could make it less reliable.
Job openings should decline as the economy cools before we see job losses because, in a recession, firms will stop actively looking to fill jobs before they start downsizing. But that has already occurred. On a year-over-year basis, job openings fell by 4.3% in November, similar to declines seen in February 2008 and November 2019. Following those two months, nonfarm payrolls began to decline on a year-over-year basis in May 2008 and April 2020, respectively.
Recent economic news has not been all that optimistic. The Institute of Supply Management’s manufacturing index contracted in the final two months of last year, following 30 uninterrupted months of expansion, clearly messaging a slowdown in factory activity as both new orders and production fell into negative territory. The services index in December contracted for the first time in more than two years, signaling that even the sector that was expected to do well is now struggling.
What We’re Watching …
Our hope for better news is pinned on inflation easing, which many economy watchers are expecting to see in this week’s release of the consumer price index for December.
If that doesn’t materialize as anticipated, buckle up.
CoStar Economy is produced weekly by Christine Cooper , managing director and chief U.S. economist, and Rafael De Anda, associate director of CoStar Market Analytics in Los Angeles.