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Jolts Report - Lower Job Openings And Quits But Still At Remarkably High Levels Historically

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by: Tim Worstall
Summary

The U.S. jobs market is still remarkably strong by any historical standard. High levels of openings, quits, hirings.

We, therefore, expect real wage growth to continue and possibly unemployment to fall even further.

There is a weakening in the rate this is all happening at though, the excess demand seems to be falling - it's the response to this that matters.

JOLTS Report

The JOLTS report is the one on the details of the labour market giving us the numbers of firings, quits, job openings and so on. Examination of the entrails tells us a lot more about what is actually happening than the mere unemployment number does.

What really matters here though is what the numbers tell us about what can happen. Specifically, at the moment, we want to know whether the Federal Reserve has room to allow the expansion to continue. Is it possible to leave rates where they are, even lower them, in order to keep growth going? Or are they going to have to raise them to head off inflation?

Weirdly, this means that we'd like to see a slowing of job creation. For that would indicate more room to leave things alone. That's what we've got, so look for lower rates.

The JOLTS numbers

The report is here:

The number of job openings was little changed at 7.1 million on the last business day of August, the U.S. Bureau of Labor Statistics reported today. Over the month, hires edged down to 5.8 million and separations were little changed at 5.6 million. Within separations, the quits rate was little changed at 2.3 percent, and the layoffs and discharges rate was unchanged at 1.2 percent. This release includes estimates of the number and rate of job openings, hires, and separations for the nonfarm sector by industry and by four geographic regions.

We can also look at a little more detail:

JOLTS

(Job openings and hires, Bureau of Labor Statistics)

And:

JOLTS

(Quits and Layoffs, Bureau of Labor Studies)

To Explain

We generally think that when the unemployment rate is low, the employment to population ratio high - as they are at present - then we'll have real wage growth. And we do too, which is nice. Not always true that theory and reality agree.

But more than this in detail we think that quits are an important part of this process. It's people willing to leave one job to take another that really drives wages up. It's an indication that there really isn't that free and unemployed labour out there, thus employers must tempt people with better job offers.

Plus, obviously, the people who want to stop people quitting have to offer them more money.

Similarly, when job openings are significantly above hires we think that's showing that people are finding it hard to attract the labour they want. Thus real wage rises again to find them.

So, we not only expect real wage rises from the general situation at present, we expect more of it from these details.

OK, great, but?

There is always a but of course. If this process goes on too strongly then we'll get inflation. So, what we'd like is that this happens, because we want rising real wages, but not too fast. In fact, if we could get it that wages rise at about the rate of productivity improvement - that 1-3% a year that's the historical average - then this could go on forever. If it rises above that we'd expect inflation, thus the Fed raising rates to slow things down.

There's also

It's also true that we don't really know what full employment is. It depends upon the underlying structure of the economy. Things like union power, the geographical mobility of labour and so on. About the best definition we've got is the rate below which we get wage-led inflation which is a bit tautologous.

What we do know is that as yet we've not got there. Either the inflation or, obviously given the definition, full employment. We'd like to be running the economy at full pelt, obviously, because this is what makes us richer. So, there's a definite desire to keep the party going until we really get the inflation, to see whether we can drive unemployment down further than the current 3.5%.

So, what's JOLTS telling us?

As Moody's Analytics says:

August JOLTS data confirm a slowing but still buoyant labor market. Job openings dipped slightly in August to 7.05 million, from 7.17 million in July. They still remain remarkably high in historical perspective but have declined by 8% since their peak last November. Hires have also dipped from 5.98 million to 5.78 million in August. This suggests some weakening in demand for workers although separations have fallen also from 5.8 million to 5.6 million. Fewer workers are leaving jobs voluntarily and layoffs are unchanged. Net employment remains more than enough to absorb job seekers.

It doesn't look like the employment numbers are running away with us. That minor cooling would seem to indicate that we've not got inflationary pressures building up. We've still got that high employment, real wages rising, but not inflation. Which is nice as it accords without current inflation information.

The effect of this?

If the Fed should wish, this means they can either keep rates static or even lower them. There is that desire to raise rates simply to have more room for monetary policy but that's a medium-term thing. We don't have any of the warning signs that we actually need them in order to beat inflation.

My view

I've been so so about the likelihood of rate cuts in the near future but I'm now coming to the view that we will have another cut this month. 0.25% off the Fed's target rate. Not because the economy particularly needs it but simply because it's possible, so why not?

The investor view

Plan for another rate cut this month, October. Much of this is already in market prices so don't expect much of a difference when it happens. It's the next direction that matters, this being new information to those markets. My best guess is that we'll resume rate rises toward the end of the year, December maybe.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.