Over the past year, the U.S. labor market has cooled notably by virtually any measure. Job creation has slowed considerably, unemployment has ticked upward, and the number of job openings has declined materially. However, it’s important to view the data in its historical context, not just the recent trend.
As shown above, the ratio of job openings to unemployed individuals has declined considerably since 2022. Even so, aside from the last few years, the current balance is still among the most constructive for those seeking employment over the past 25 years.
A cooldown in labor market conditions was no accident, but rather a targeted effect of the Fed’s aggressive rate hikes over the past two years. A more balanced labor market has helped to put a damper on wage growth, in turn alleviating one source of inflationary pressure. However, the Fed’s policy maneuvering is a balancing act. Excessive tightening would create the risk of derailing the economy rather than just slowing it, leading to growing job losses and a more pronounced rise in unemployment. Striking that balance is a tall order for policymakers, but a necessary one to curtail inflation without derailing growth. So far, it’s a balance that the Fed has seemingly been able to strike.
Today, the labor market appears to be relatively healthy despite the cooling trend. Employers are still hiring, but with a much better balance between the number of openings and potential workers to fill them. Continued demand for workers, low unemployment, and ongoing job creation all point to a resilient labor market that should continue to underpin household finances, consumer spending, and economic growth.
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