Breitbart Business Digest: Surging Job Openings Foreclose Hopes of Labor Market Cooling

The number of open jobs in the United States rose in July, defying predictions that vacancies would fall for a fourth straight month and dashing hopes that the Federal Reserve’s monetary policy tightening had already throttled demand for labor.

We already knew that U.S. employers were urgently seeking workers in July thanks to the blowout payroll figure. A jaw-dropping 528,000 workers were added to payrolls in July, including 471,000 onto private payrolls, making it the strongest month since February. In other words, payroll growth returned above the levels seen since the Fed started hiking interest rates.

It was possible that the big month of hiring would actually subtract from job openings. The survey that produces the monthly payroll is taken mid-month while the Job Openings and Labor Turnover Survey (JOLTS) investigates the situation as of the last day of the month. So the 10.7 million job openings initially reported for June might have been reduced by 500,000 or so workers filling those jobs in the July payroll survey taken a few weeks later. Indeed, something like that appears to have been what Wall Street economists were anticipating when they forecast that vacancies would fall to 10.3 million.

That was pretty close to the opposite of what really happened. First of all, the June number was revised up to 11 million vacancies, so the decline from May to June was far less impressive than expected. Unrounded openings fell from 11.303 to 11.040. More important, openings shot up in July to 11.239, nearly erasing any cooling in the prior month. If you add payroll growth and vacancy growth, employers were looking for an additional 727,000 workers in May.

The unemployment rate fell to 3.5 percent in July, bringing down the total level of unemployment to 5.670 million. That’s the lowest level of unemployment since the turn of the century—without adjusting for the change in the size of the population or the workforce. This pushed the ratio of vacancies to unemployed people back up to nearly two to one, a rounding error from tying for the all time record hit in March. We know from the speeches of Fed Chairman Jerome Powell and others that Fed officials regard this as an important gauge of labor market tightness and that these levels are considered a signal of extreme imbalance likely to fuel more inflation.

This is terrible news for Powell, who has long been hoping that openings and the vacancy ratio would fall.

“If you were just moving down the number of job openings so that they were more like one to one,” Powell said in March, “you would have less upward pressure on wages. You would have a lot less of a labor shortage, which is going on across the economy.”

“There’s a path by which we would be able to moderate demand in the labor market and have vacancies go down without having unemployment going up,” Powell said in May.

In Late July, he sounded a hopeful note:  “There’s a feeling that the labor market is moving back into balance. If you look at job openings or quits, you see them moving sideways or perhaps a little bit down. But it’s only the beginning of an adjustment.”

The message of the July JOLTS report is that we are not traveling along that path. The labor market did not move back into balance. It moved further toward imbalance in July.

This has important implications for one of the biggest debates raging in economics right now. Back in July, Federal Reserve economist Andrew Figura and Fed Governor Chris Waller argued that it is possible to bring down the number of openings without causing a major rise in unemployment. MIT economist Olivier Blanchard and Harvard economists Alex Domash and Larry Summers wrote a blistering retort that argued that the Figura and Waller analysis “contains misleading conclusions, errors, and factual mistakes.” They argued that “vacancies are very unlikely to normalize without a major increase in unemployment.”

In light of openings soaring alongside payroll growth in July, it looks like Team Harvard-MIT has the winning argument.

The unexpected openings growth makes the August jobs report, due out this Friday, all the more important. If it shows that employers are still adding workers to payrolls at a breakneck pace, it will confirm the deepening imbalance implied by JOLTS. If unemployment falls further, it will imply the vacancy ratio may rise to a new record high. A lot of attention will be paid to wage gains to see if labor tightness is feeding into rising labor costs.