A Federal Reserve report found signs of the labor market cooling across the United States, with many regions seeing a higher number of applicants for job posts and more selective hiring by businesses.
The report pointed out that “two Districts continued to note a tight labor market, and several described hiring challenges for firms seeking specialty skills, such as auto mechanics or experienced engineers in the Boston and San Francisco Districts, respectively.”
However, almost all districts reported one or more signs of a “cooling labor market,” like easing wage pressure, lower turnover rates, more selective hiring by companies, and larger applicant pools for jobs, the report said.
“The pace of wage growth was characterized as moderate in Boston, Richmond, Chicago, and Dallas; as modest in New York and Philadelphia; and as slight in St. Louis. Firms from many Districts expected wage pressures to ease and wage growth to fall further over the next year,” the report said.
The Beige Book is published two weeks prior to the meeting of the Federal Open Market Committee (FOMC) that sets interest rates. The upcoming FOMC meeting is scheduled for Jan. 30 and 31, with the Fed expected to leave its benchmark rate unchanged for the fourth straight time.
Elevated interest rates are usually bad for the labor market since high rates raise the financing costs for businesses, potentially dampening investments and likely reducing jobs.
The Fed’s Beige Book comes as recent data from the U.S. Bureau of Labor Statistics (BLS) also pointed to a cooling labor market.
The number of Americans quitting their jobs edged down to 3.47 million from 3.62 million a month earlier. This is the lowest number of Americans quitting their jobs since February 2021. As fewer people resign from their jobs, wage growth will likely moderate.
Quit rates, which measure the confidence of the labor market, declined to 2.2 percent, the lowest level since September 2020.
2024 Labor Market
In its January 2024 monthly labor market update, job site Indeed reported there has been a “continued slowdown” in wage growth.“On its current trajectory, posted wage growth would descend to 3.5 percent by February, and its pre-pandemic average of 3.1 percent by May,” it said.
“Slowing wage growth might be welcome news for central bankers, but on its own, it would be concerning for workers and job seekers. However, weaker nominal wage growth has been paired with a more pronounced reduction in inflation.”
Such employees are considered a key predictor of the strength of the labor market since temporary workers are the first to be hired when businesses start to staff up and the first to be cut when they downsize.
“There’s a clear trend toward cooling,” Andy Challenger, senior vice president at outplacement firm Challenger, Gray & Christmas, told the outlet. “We expect elevated layoffs into the first quarter and after that it could level off or get worse.”
However, the cooling labor market may not mean that there would be large-scale layoffs.
“Unemployment is unlikely to increase dramatically as companies shy away from firing workers,” Ellen Zentner, chief U.S. economist at Morgan Stanley, said in a research note.
“Labor shortages and the high turnover costs over the past several years mean firms are hesitant to let their workers go even as economic growth slows,” she added.
As of December 2023, the U.S. unemployment rate was at 3.7 percent. S&P is expecting this to rise to 4.3 percent in 2024 and then to 4.6 percent in 2025.
A key factor that could drive up inflation would be a recession. In November, the Leading Economic Index (LEI), which provides an early indication of where the economy is heading in the near term, declined.
“Housing and labor market indicators weakened in November, reflecting warning areas for the economy. The Leading Credit Index and manufacturing new orders were essentially unchanged, pointing to a lack of economic growth momentum in the near term,” said Justyna Zabinska-La Monica, senior manager, business cycle indicators, at The Conference Board, which published the LEI.
“Despite the economy’s ongoing resilience … the US LEI suggests a downshift of economic activity ahead. As a result, The Conference Board forecasts a short and shallow recession in the first half of 2024,” she said.
