According to new research presented at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming, the U.S. job market may be approaching a critical juncture where a continued decrease in job openings could lead to a more rapid rise in unemployment. Economists Pierpaolo Benigno and Gauti B. Eggertsson argue in their paper that policymakers face two risks: being too slow to ease policy, potentially causing a “hard landing” with high unemployment, or cutting rates prematurely, leaving the economy vulnerable to rising inflation.
Their current assessment suggests the former risk outweighs the latter. The research combines two key relationships in a single economic model: the Phillips Curve, which examines the relationship between the unemployment rate and inflation, and the Beveridge Curve, which looks at the relationship between the job vacancy rate and the unemployment rate. The paper suggests that when labor markets are loose, supply shocks impact underlying inflation and monetary policy less.
However, supply problems and tight labor markets can generate persistent inflation surges. The researchers focus on the ratio of job openings to the number of people looking for work rather than the unemployment rate itself. When the number of openings and unemployed jobseekers is close to balance, reducing inflation involves a large rise in joblessness.
Conversely, when the labor market is tight, with high demand for workers relative to their numbers, the cost of reducing inflation in terms of increased unemployment is relatively low.
The job-openings-to-unemployed metric became important in recent Fed discussions, particularly when it spiked above the 2-to-1 mark during the reopening from the COVID-19 pandemic. Analysis by Fed Governor Christopher Waller and staff economist Andrew Figura in 2022 suggested that bringing that ratio closer to balance could lower inflation without the unemployment rate rising much.
However, the current ratio of 1.2 is still above the one-to-one level that the researchers say marks the breakpoint between labor market conditions that generate inflation and those that don’t. The researchers warn that if the openings-to-unemployed ratio continues to slide, the economy is at a point where unemployment could rise fast. The research projects that the Fed could achieve its inflation objective, with the number of job openings in balance with the number of unemployed, at a jobless rate of around 4.4%.
Crucial job market trends analyzed — with a warning
Once the one-to-one threshold is passed, further reductions in inflation are likely to be more costly, with a job openings-to-unemployed ratio of 0.8, causing unemployment to rise above 5%. David Rosenberg, a renowned economist known for predicting the 2008 financial crisis, has issued a stark warning regarding the future of the U.S. economy.
Rosenberg suggests that current economic indicators point towards a looming recession. The Bureau of Labor Statistics recently revised its jobs growth data from March 2023 to March 2024, revealing a significant downward adjustment of 30 percent from the initial figure of 2.9 million. Rosenberg criticizes the Federal Reserve for its prolonged tight monetary policy, which has pushed interest rates to a 23-year high of 5.5 percent.
David Rosenberg, the renowned economist, highlights two predictive models for economic downturns.
Despite the seemingly positive addition of 206,000 jobs in June, Rosenberg points to underlying weaknesses, such as the revision showing 63,000 fewer jobs added in April 2024 than initially reported. Rosenberg highlights two predictive models for economic downturns. One model, which enhances the yield curve to serve as a recession indicator, currently shows a 57 percent chance of recession.
Another model, based on job openings, indicates that the U.S. is in “possible recession” territory, with trends pointing towards a more certain downturn. Unemployment also rose to 4.3 percent in July, its highest level in almost three years, adding to concerns about the labor market. Federal Reserve Chairman Jerome Powell acknowledged at the Fed’s annual retreat in Jackson Hole, Wyoming, that policy adjustments might be necessary to address the evolving economic landscape.
The next Federal Open Market Committee meeting in September is expected to see a rate cut by at least 25 basis points. However, a report from investment manager ClearBridge suggests that the current unemployment rate spike might be unique. Typically, a recession starts when the 3-month moving average of national unemployment is 0.5 percentage points or more above its low over the prior 12 months.
The question is — does current data suggest the situation might be following this pattern, or not?
