The Job Market Shows Signs of Cooling

Brent Schutte, CFA, is chief investment officer of the Northwestern Mutual Wealth Management Company.

Stocks ended mixed on a shortened trading week as investors digested signs that the economy continues to slow and that the employment picture may be approaching an inflection point. A modest loss for the broad S&P 500 marked the first time in nearly a month the index notched a losing week. The weakness came as investors continued to recalibrate their fears away from the threat of ongoing elevated inflation and now appear to be more focused on concerns of a looming recession.

While it is too early to call an end to the still tight job market, the breadth of data out last week was near universal in suggesting that the seemingly invincible labor market is starting to wilt under the gravitational pull of a weakening economy. And while we have previously highlighted the inherent lagging nature of employment reports, even some forward-looking measures that rely on hiring intentions are now showing signs of weakening. For example, the latest data from the National Association of Independent Businesses shows that just 15 percent of its members expect to add to payrolls in the coming three months, a decrease of 2 percentage points from February and the lowest reading since May 2020. For further context, the level was at 23 percent in September 2022 and came in at a recent high of 32 percent during the summer of 2021.

Another more timely measure of employment, the Job Openings and Labor Turnover Survey (JOLTS) from the Bureau of Labor Statistics also points to real-time softening of the employment picture. The latest JOLTS report shows current openings fell 632,000 in February to 9.9 million unfilled positions. The ratio of openings to available workers dropped to 1.7 positions for each job seeker, down from the previous reading of roughly 1.9. The figure came in well below Wall Street estimates of 10.4 million openings and marks the first time since May 2021 vacancies fell below 10 million.

Weekly jobless claims also came in much higher than consensus estimates, with 228,000 new claims filed for the week ending April 1. While the latest figure was well above expectations of 198,000 new claims, the biggest surprise in the report was the magnitude of adjustment to previously released numbers. Changes to the formula for seasonal adjustments now show jobless claims to be materially higher early in 2023 than previously reported. Looking at the newly adjusted numbers, jobless claims bottomed out in September 2022 at a historically low 182,000 and remained around 200,000 until February, when they began to move higher. While the current weekly numbers still suggest a strong employment picture, continuing claims may be flashing yellow. The latest data shows continuing claims (those people remaining on unemployment benefits) once again moved higher to 1.82 million, well above the level of 1.289 million recorded in September 2022. This number has edged higher in the past few months, and we view the rise in continuing claims as an early sign of softening in the labor market, as it is becoming more difficult for job seekers to land positions.

Finally, employment data released on Friday showed a still strong 236,000 new jobs, according to the Nonfarm payroll report, with private-sector jobs growing by 189,000. Both the total new positions and private payroll increases mark the fewest additions registered since December 2020; the pace of new hires remains strong but is showing signs of slowing. The unemployment rate fell to 3.5 percent, down from the prior reading of 3.6 percent. The labor participation rate moved higher. As we’ve noted in previous commentaries, we believe the narrow path to an economic soft landing is workers returning to the labor market and creating additional supply that meets demand and caps wage growth. The latest jobs report shows labor force participation edged up to 62.6 percent as 480,000 people joined the workforce. This is up from the prior reading of 62.5 and a level of 62.4 at the beginning of the year. While the latest figure is still well below pre-pandemic levels of 63.3 percent, an uptick in workforce participation at a time when hiring may start to cool should help keep labor costs in check.

Friday’s report showed wages rose 0.3 percent and are now up 4.2 percent year over year from 4.6 percent in the prior month, which marks the lowest level since June 2021. For further context wage gains peaked at 5.9 percent year over year in March 2022 and have moved lower since then despite continued labor market tightening. The latest reading is near the upper limit of the Fed’s tolerance band, and the Consumer Price Index report out this week will play a large role in determining whether the Fed tightens again in May.

Given signs that the employment data may be starting to reflect the economic weakness that has been building during the past several months, we anticipate further cooling in hiring and easing labor cost pressures. Given the already significant progress made on reducing inflation, the Fed will be able to pause the current rate hiking cycle and will have the option to pivot and cut rates later in the year should a potential recession deepen and become more widespread.  

Wall Street Wrap

Given the Fed’s intense focus on the employment picture, it is understandable that the jobs data out last week captured Wall Street’s attention. However, additional data released reaffirmed our view that the economy continues to soften and is headed for a shallow and short recession.

Further signs of a weakening economy: The latest data from the Institute of Supply Management shows the manufacturing sector logged the fourth consecutive month with readings at recessionary levels. The composite reading for the index came in at 46.3, down 1.4 percentage points from February’s reading of 47.7 (readings below 50 signal contraction). Weakness was widespread. The latest reading marks the lowest level since May 2020, when it was at 43.5. New orders declined for a seventh consecutive month, coming in with a reading of 44.3, well off the prior month’s level of 47. Prices paid also fell to 49.2 percent, down 2.1 percentage points compared to February’s reading of 51.3 percent.

Notably, staffing contracted; the latest employment reading came in at 46.9, 2.2 percentage points lower than February’s level. Survey respondents are now equally split between those adding or reducing headcount.

Services sector shows signs of slowing: While the ISM data on the services sector remains in expansion territory, it shows signs of slowing. The latest headline reading for the sector was 51.2 (readings above 50 signal expansion), a decline of 3.9 percentage points from February's level of 55.1. With the exception of a notable weak reading in December 2022, the February level was the lowest measure since May 2020. New orders dropped significantly to 52.2 from 62.6 in February. The decline in orders comes at a time when backlogs continue to shrink, and customer inventories have moved higher. As such, we believe the sector may see further weakening in the months to come.

The prices paid reading dropped to 59.5 and is down significantly from the reading of 83.2 registered in April 2022. For further context, the measure reached an all-time high of 84.5 in December 2021. The precipitous drop is important because it has served as a leading indicator of so-called “super core” inflation (PCE services excluding housing). Fed Chair Powell has identified super core readings as an area of focus in the Fed’s evaluation of inflationary pressures. The ISM prices paid reading suggests, in our view, that the super core reading is likely to slow significantly from its current elevated level of 4.6 percent year over year and move back toward a more historically normal level of 2.4 percent in the coming months.

Employment also dropped, with the latest reading coming in at 51.3 compared to the prior month’s level of 54.

The week ahead

Monday: Final wholesale inventory numbers for February will be released after market open. Of interest will be any signs of increased inventories, which could indicate slowing production in the future.

Tuesday: The NFIB Small Business Optimism Index readings for February will be out before the opening bell. The report should provide insights about the state of the labor market for small companies and expectations related to price increases at the consumer level in the year ahead.

Wednesday: All eyes will be on the Consumer Price Index report from the Bureau of Labor Statistics. Data continues to show progress in the disinflationary process, and we will be looking for signs that the services side of the economy has begun to follow the same downward trajectory that has been in play for the last several months on the goods side of the economy.

Thursday: The latest readings from the U.S. Bureau of Labor Statistics on its Producer Prices Index will offer a front-line view of changes in costs for buyers of finished goods. It can provide insights into how easing input costs, such as raw materials and wages, are impacting the prices of goods bought by end consumers.  

Initial and continuing jobless claims will be announced before the market opens. Initial filings dropped last week, and we will be watching for signs that the employment picture is weakening.

Friday: The U.S. Census Bureau will release the latest numbers on retail sales before the opening bell. The data should yield insights into whether consumers are continuing to pull back on discretionary spending in the face of rising costs. We will also be watching for changes in the trend of consumers turning away from buying goods.

The University of Michigan will release its preliminary report on April consumer sentiment as well as inflation expectations. We will be watching the report for signs that respondents’ expectations in the coming year and, more importantly, five- to 10-year period continue to ease.

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