JOLTs Data Reveals Weaker Labor Market

The U.S. Bureau of Labor Statistics (BLS) reported a decrease in the number of job openings to 9.59 million on the last business day of March vs an expectation of 9.74M, reflecting a slowing labor market. The last reading was 9.97M, so this is a pretty sizable decline month-over-month with small establishments showing the brunt of the decrease in open jobs.

Weaker JOLTs Data: A Closer Look

The March JOLTs report showed a 1.0 percentage point drop in the job openings rate to 5.8 percent since December. On the other hand, the number of hires and total separations remained relatively unchanged at 6.1 million and 5.9 million, respectively.

The largest month-over-month declines were in transportation, warehousing, and utilities (-1.8 percent), followed by mining and logging (-0.9 percent), and construction (-0.8 percent).

The Midwest and West were the weakest regions, both saw job openings down 0.4 percent month-over-month.

The quits rate, which serves as a measure of workers' willingness to leave jobs, saw little change at 2.5 percent. The layoffs and discharges rate increased to 1.2 percent, with notable increases in construction, accommodation, and food services, and health care and social assistance.

What it Means for the Economy and Inflation

A weakening labor market is a double-edged sword for the economy. On one hand, it suggests that the Federal Reserve's efforts to slow inflation by tightening monetary policy might be working. With fewer job openings and higher layoffs, employers may face lower wage pressures, leading to slower wage growth and, consequently, lower inflation.

On the other hand, a slower labor market may negatively impact the economy, potentially leading to lower consumer spending, reduced investments, and slower GDP growth.

The Impact on Different Sectors and Establishment Sizes

The JOLTs data reveals divergent trends across various industries and establishment sizes. For instance, job openings decreased in transportation, warehousing, and utilities, but they also increased in educational services. Similarly, separations decreased in accommodation and food services, but increased in construction.

The data also indicates that smaller establishments (1-9 employees) experienced a decrease in job openings and an increase in layoffs and discharges, while larger establishments (over 5,000 employees) saw little change in their job openings, hires, and total separations rates.

Smaller businesses are more vulnerable to economic headwinds, particularly as credit conditions tighten and rates on revolving lending facilities rise, while larger companies are generally better equipped to weather uncertain conditions.

Closing Thoughts

The weaker JOLTs data points towards a slowing labor market. While it might indicate progress in the Fed's efforts to curb inflation, it also raises concerns about the potential negative impact on economic growth. Particularly after Q1 GDP came in at only 1.1%.

We believe that the labor market and commercial real estate are two of the last shoes to drop, so to speak, as we approach the likelihood of a recession rising in the second half of 2023.

The New York Fed’s recession probability indicator recently hit 57.7%, which is the highest reading in about 40 years. With 12 months of leading economic indicators showing negative readings, regional banks showing increasing signs of stress, the debt ceiling debacle becoming a point of focus for markets, and office vacancy rates at record highs, we believe that there are signs across the board that it is wise to be cautious.