Powell Isn't Worried About an Increase in Job Openings

The labor market just got tighter...

This morning, the U.S. Bureau of Labor Statistics ("BLS") released its Job Openings and Labor Turnover Survey ("JOLTS") for December. The data showed companies are seeking to fill roughly 11 million positions – more than the expected 10.3 million positions. At the same time, November's figures were revised lower from 10.46 million to 10.44 million.

December's data is still well below March's peak of roughly 11.9 million job openings. But the numbers aren't showing us that the available employment opportunities are shrinking. That's the trend we want to see, rather than an increase...

The JOLTS survey tells us the number of hires, quits, and job openings each month. To generate this survey, the BLS collects data from 20,700 nonfarm and government businesses and estimates changes on a national basis.

The results help the Federal Reserve and money managers gauge the job market's relative tightness. In other words, they can see how easy or difficult it is for an individual to find work.

We can also see this by comparing the survey's metrics with the number of people out of work and looking for new jobs. The latest BLS number showed just over 5.7 million total unemployed individuals are in the labor force. That was below November's number of more than 6 million.

So with 11 million job openings, there are roughly 1.9 available jobs for every unemployed person...

Fed Chairman Jerome Powell has said he wants to see this ratio between the number of job openings and the total number of unemployed folks move lower. Prior to the COVID-19 pandemic, the number averaged around 1.0 compared with the post-pandemic average of around 1.2.

The problem here is that a falling unemployment number combined with more available opportunities means the ratio is moving back up. In November, that number was 1.7... and now it's 1.9. That's approaching the recent peak that was set in March 2022. But remember that the numbers are backward-looking, so it's unlikely they're representative of the current labor market picture.

Let's consider the results from a monetary-policy perspective...

The Fed has targeted two key metrics it wants to bring back into balance in its fight against inflation: the supply-and-demand dynamics in the housing and labor markets.

Housing is a major component of consumer inflation. By driving up the cost of a home loan, the central bank is expecting demand to fall, supply to rise, and prices to drop... which would bring down overall inflation growth.

And according to data from the S&P CoreLogic Case-Shiller Index, that scenario is starting to play out... Prices have contracted for four straight months. And as we keep going up against more difficult comparisons heading into the spring, prices are likely to show further declines.

The central bank has a similar outlook for the job market...

Labor costs drive business inflation. When there are fewer workers available, companies could be forced to pay more to obtain new employees. Those costs are then passed on to the consumers as companies raise prices for their goods. So, if the Fed can increase the pool of available workers, it's anticipating wages will drop, which would ease inflation growth for businesses.

Yet today at the Federal Open Market Committee ("FOMC"), Powell assuaged some of investors' fears...

At the press conference following this afternoon's interest-rate increase by the FOMC, the chairman didn't sound as concerned about the labor market.

When asked about the lack of increase in unemployment, he said it's not ideal, but it's underpinning the economy. He noted the central bank is seeing inflation growth slow in both wages and the price of goods. In fact, he went as far as to say it's seeing broad disinflation.

Powell also noted the ratio we've discussed sits at 1.9. But he said the figures have been erratic lately, so he's not overly concerned. In addition, he stated the gains the central bank is seeing on the price pressure front means we're close to the end of the rate-hike cycle. At this point, the Fed is more concerned about overtightening.

So today's employment numbers weren't ideal. In fact, they were downright awful. But policymakers aren't as concerned with this at the moment. They see strong employment as a way to orchestrate a soft economic lending despite all the rate hikes.

Again, we'll want to see this ratio move lower. That will be a signal for the Fed that there's little risk of inflation heating back up. And the change will give it room to start cutting interest rates once more.