An unexpected rise in July’s US unemployment rate was one trigger for the market turmoil in early August. It turned investor attention to the Sahm rule, which looks at the change in the unemployment rate as an indicator of an impending recession. US Federal Reserve Chair Jerome Powell burnished its credentials by calling it ‘a statistical regularity’.
So, where do things stand on the US labour market?
Note that ‘maximum sustainable’ employment is one half of the Fed’s dual mandate – the other being inflation. How to measure the level of employment is the challenge.
Alan Greenspan, who served as the Fed chair from 1987 to 2006, often said that the percentage of unemployed people who had quit their jobs voluntarily (‘job leavers’ in Exhibit 1 below) was a good indicator of the economy’s health.
One would assume people only leave their jobs if work is plentiful and they have already found, or expect to find, a new one fairly easily (assuming they still wish to work). In July, the percentage of job leavers stood at 11.9%, down from 14.3% a year before. The long-term average is 11.5%.
The latest ‘Beige Book‘ analysing activity in the private sector noted: “Contacts in several districts expect to be more selective on who they hire and not backfill all open positions.” It noted ‘increased worker availability and less competition for workers’.[1]
The Federal Reserve of New York recently released the July 2024 labour market survey. It points to a deterioration in several indicators: the proportion of job seekers rose and satisfaction with wage compensation fell. Moreover, the average expected likelihood of becoming unemployed rose to 4.4% from 3.9% in July 2023 (see Exhibit 1) – its highest level since the series started 10 years ago.
At his latest press conference, Jerome Powell said: ‘We’ll be looking at labor market conditions and […] we’re prepared to respond if we see it’s not what we wanted to see (a gradual normalization of conditions). It wouldn’t be any one statistic; we’d be looking at all the things – surveys, quits, hires… — to determine the overall status of the labour market.”
There are thus several signs that the US labour market is shifting from tight to easier conditions and more slack. This should pave the way for Fed policymakers to start cutting the policy rate at their meeting next month.
[1] Italics added
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