Considering JOLTS: the US job market weakens, but only to pre-pandemic tightness

The US labor market has gradually normalized from a period of historic tightness. Has the Federal Reserve successfully engineered a soft landing? Ahead of the central bank's meeting next month, we consider the signals we might soon receive from JOLTS - the Job Openings and Labor Turnover Survey.

Our first chart tracks the ratio of job openings to unemployment over recent decades -- a metric monitored closely by Fed Chair Jerome Powell. A ratio of 1 means the number of job seekers and empty jobs are about equal. This ratio plunged during the pandemic and then spiked to a peak of 2 amid widespread labor shortages in March 2022.

After the historic Fed tightening cycle that followed, the ratio is back to 1.2 -- the same as its 2019 average. It's notable that this was still a very strong labor market in historic terms; for almost two decades, the ratio was below one, i.e. there were more job seekers than jobs available.

Our second chart expresses these trends a different way. The gap between job vacancies and the unemployed persons exceeded 6 million at the worst of the labor shortage. That figure has now narrowed to about 1 million.

The July JOLTS report is scheduled for Sept. 4, with the August unemployment figures due on Sept. 6.

To get an early sense of what might be reported, we can turn to higher-frequency alternative data from Revelio Labs for an optimistic signal. In our third chart, we've visualized Revelio's weekly job postings against the monthly JOLTS figure. The weekly figures suggest resilience: the number of active job postings has slightly increased since June.

By contrast, average hourly wage growth has also slipped below 4%, which might be influencing the Fed chairman. In last week's Jackson Hole speech, Powell signaled that the long-awaited pivot to rate cuts is likely here, at least in part to support the labor market.

Finally, we explore two economic concepts: the Beveridge Curve (which illustrates the historic relationship between unemployment and job openings; higher joblessness usually coincides with fewer jobs available) and the Sahm rule, an early recession indicator named after the Fed economist who developed it.

Our Beveridge scatterplot indicates how the labor market has moved into a flatter part of the curve from that March 2022 extreme. We can also see how the pandemic period was a historic outlier.

As for the Sahm rule, it's saying a recession is here. The rule compares short-term changes in unemployment to the norm over the past 12 months; we've added a dotted red line to our chart to represent the recession threshold, which was reached when the July jobs report showed unemployment had climbed to 4.3%. (To be sure, Claudia Sahm herself has said the rule might not apply to the current cycle.)

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