One idea I’ve been pondering, and which seems worth flagging to clients after the last few weeks of data and earnings calls, is the possibility that after 3 years of disruptions and elevated turnover in labor market labor market churn measures (quits, gross hires, and openings) might go through a period of post-boom bullwhip where they temporarily drop below their 2019 levels even if other measures of the labor market remain relatively healthy.[1]
This is admittedly something that’s a bit more speculative than fully grounded and I am not entirely sure how to handicap the odds as its a fairly novel concept if applied to labor markets (but better to flag tentatively and watch than wait for 100% confirmation), even if much better understood in goods and investment cycles. If it is likely to happen, we should start seeing broader signs soon and this will have notable impacts on the Fed and broader macro debates.
In the event some version of this does occur, sectors such as leisure and hospitality, retail trade, and warehousing seem more likely to be impacted than others, with some recent earnings call commentary leaning in that direction but the macro data not as suggestive.
If this happens, even among higher levels of job growth and a low-enough unemployment rate, it will likely lead to increased Fed and economic commentator disagreement, with the more dovishly inclined able to point to less-robust churn measures as a potential warning sign of recession or at least signal that the Fed has done enough and should start to pivot soon. Given the quits rate’s historical outperformance as an indicator of labor market slack there is a robust basis for this view.
As with inflationary bullwhips after large sectoral surges (the ECB’s Schnabel gave a speech last week on this that is worth reading or skimming, even for US- focused audiences), how long the payback downturn in churn lasts, even how intensely, may not be that meaningful for actual underlying inflationary pressures, especially if one views the world through a hawkish lens. Admittedly in the labor market context that metaphor may be a bit stretched but it is worth bearing in mind that some payback-driven softening could tell us little about underlying trends.
The large or massive cumulative gap (depending on if you looking at the Atlanta Fed wage growth tracker or ADP’s wage data) between job switcher and job stayer wage growth since mid-2021 could lead to more modest declines in wage growth than a linear mapping from quits to the ECI, for example, would suggest as whole-economy wages reconverge after the switching surge.[2] Cumulatively the ECI has been a bit stronger than quits would tell you to expect since 2021H2, perhaps reflecting lagged wage catchup or the impact of still-elevated inflation and/or inflation expectations on the wage setting process.
It’s worth noting amidst the other data that so far the layoffs rate has barely budged off its post-covid lows; this could be a sign of cyclical robustness amidst odd labor market internals or that after so much labor market churn firms remain extremely hesitant to fire workers even if demand was to slow from here. [3]
Mechanically a transitory dip in quits this would also lead to less hiring in gross terms, as mildly seen in the JOLTS data but not the NFP data, as there would be fewer open positions needing to be filled.
Gross hiring rates (which are what JOLTS measures) have dipped slightly below their usual linear relationship to the unemployment rate in latter 2023, after running well above for the prior few years given post-pandemic rehiring, but net hiring remains strong and above that predicted by the usual relationship with the unemployment rate on a 3mma basis (where NFP growth was fastest mid-cycle once the acute recessionary impact faded but before hiring runs into late-cycle concerns or labor supply constraints).
Guy Berger’s, formerly of LinkedIn, blog post on the JOLTS data christened this “the great stay” following “the great resignation”, a quippy title I wish I’d thought up. ↑
Gerard has made the this point before and I think it reasonably conforms to the catch-up and relative price adjustment dynamics story told about the lagging growth and deceleration in core services ex housing inflation. ↑
One of the broader issues at the moment is that the path to a slow landing and hard one are likely to look at least fairly similar for now. ↑
