August 30, 2023
In advance of Friday's August jobs report, we look at signs this week that the pre-pandemic state of the job market — healthy, but not overheated — may be returning.
- Plus, what the latest GDP revisions mean for the Federal Reserve.
Situational awareness: Daniel Hornung, a veteran of the Biden White House, has been promoted to deputy director of the National Economic Council, where his portfolio will include macroeconomics, markets and housing.
Today's newsletter, edited by Javier E. David and copy edited by Katie Lewis, is 666 words, a 2½-minute read.
1 big thing: The labor market returns to normal
The job market is returning to a familiar place: strong, but no longer in its overheated, pandemic recovery state.
Why it matters: Those COVID-19 distortions had great benefits for workers, with plentiful job opportunities and booming wage gains. For the Fed, the out-of-whack dynamic fueled inflation.
- But now, the labor market looks more reminiscent of pre-pandemic times, with sustainable conditions appealing to both American workers and central bankers.
What's new: Key indicators released this week support that conclusion.
- The latest is ADP's employment report, which shows job growth coming off a boil. Private-sector employment increased by 177,000 in August, a notable slowdown from the 324,000 gain the prior month.
- The rate of people voluntarily quitting their jobs — an indicator of workers' confidence in their job market options — fell to pre-pandemic levels in July, according to data out yesterday.
What they're saying: "This is a month where we saw the hiring that has defined the post-pandemic recovery go from exceptional to sustainable," ADP chief economist Nela Richardson said on a call with reporters this morning.
- The data "really does represent a pivot back to normal — normally strong instead of abnormally strong," Richardson added.
Between the lines: The Great Resignation was one of the more high-profile labor market trends, one that suggested a hot labor market triggered unprecedented job-switching rates.
- That is officially in the past, as the quits rate fell to 2.3% in July, returning to the rate seen in February 2020, according to the Job Openings and Labor Turnover Survey (JOLTS).
- In the leisure and hospitality sector, the poster child of the "quits boom," workers are quitting at a slower rate than before the pandemic.
- Hiring, as measured by JOLTS, happened at a rate more in line with pre-pandemic trends. Layoffs remain at low levels consistent with the pre-COVID labor market.
Yes, but: Other indicators point to a labor market where demand for workers still outnumbers supply of them relative to pre-pandemic times, though to a lesser extent than in 2022.
- For instance, there are 1.5 open jobs for every available worker, down from the peak of two open jobs seen in March 2022.
The intrigue: "We can't go all the way back to the 2019 labor market when we have 2023 interest rates. That's going to determine hiring to a certain extent," Richardson said. She noted interest rate-sensitive sectors like financial services where hiring is flat.
What's next: The government payrolls report, out Friday, is expected to show the economy added 170,000 jobs in August — the fewest since December 2020.
2. Slower spring growth
A revision of second-quarter GDP numbers contains two pieces of good news for anyone hoping for an economic soft landing.
Driving the news: The economy expanded at a 2.1% annual rate in the April through June quarter, the Commerce Department said this morning, not the 2.4% initially estimated.
- More noteworthy, gross domestic income, an alternate measure of economic growth, showed an even more modest expansion. It rose at only a 0.5% annual rate in Q2, implying growth well below the long-term trend.
The intrigue: The Fed aims to bring down inflation through a period of growth below the long-term trend, which Fed officials think is something like 1.8%.
- As measured by GDP, it just isn't happening. The third quarter, currently about two-thirds complete, looks likely to be the fifth straight of above-trend growth.
- GDI, which in theory should track with GDP, is showing the opposite, with below-trend growth for three straight quarters. Indeed, it is slightly negative over the last year, down 0.5% from Q2 2022.
A common way of splitting the difference is to average the two measures in hopes of capturing the underlying growth trajectory of the economy. That shows 1% growth over the last year, within the sweet spot the Fed is aiming for — below-trend but non-recessionary.
The bottom line: The income numbers, combined with the latest GDP revision, can give some ammunition to Fed officials who believe it's time to be done with interest rate hikes.