The Big Idea
Riding the JOLTS Seesaw
Stephen Stanley | November 4, 2022
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors.
Job openings have become a key indicator of the labor market as labor demand has run well ahead of labor supply. With growing signs that demand has finally begun to moderate, there is a presumption that job openings should steadily come off after soaring to all-time highs. However, not once but twice in recent months, the JOLTS report on job openings has defied widespread expectation that it would sink to its lowest since early 2021. The gauge has proven far more resilient than anticipated.
The Bureau of Labor Statistics created the JOLTS report about 20 years ago to highlight the incredible churn in the labor market. Market participants well understood that net hiring typically ran in the vicinity of 100,000 to 200,000 a month. But most had no idea that gross hiring and separations every month are in the millions. They currently run near 6 million each. It offers quite a different perspective to know that a 100,000 payroll gain typically reflects something like 6.1 million hires and 6 million separations in a given month.
As it turns out, the JOLTS report has garnered increasing attention over the years for other reasons. In the 2010s, then Fed Chair Yellen highlighted the relatively low level of quits in the JOLTS report as proof that workers remained fearful of layoffs and therefore hesitated to switch jobs or to aggressively push for raises, indirect evidence of slack in the labor market.
Then over the last year or two, the job openings measure has gained more emphasis. An economy rarely runs short of labor to the extent that the post-Covid US economy did in 2021 and 2022. In that unusual circumstance, the pace of payroll increases did not fully capture the degree of strength in labor demand, because firms were unable to fully meet their workforce needs. In that circumstance, measures of unfilled job openings have offered a helpful supplemental angle on the state of the labor market.
Record job openings
Job openings surged last year to levels several million above pre-pandemic years, a time when labor demand was already robust. JOLTS job openings far exceeded prior levels beginning in the spring of 2021 (Exhibit 1). At the peak, earlier this year, JOLTS job openings neared 12 million. The high going back to 2000 and before pandemic had been about 7.5 million.
Exhibit 1: JOLTS Job Openings
Chair Powell at his May post-FOMC press conference highlighted the ratio of JOLTS job openings—he referred to the series as “vacancies”—to the number of unemployed figures in the monthly employment release (Exhibit 2). At the time, the ratio was 1.9 vacancies for each unemployed person. When asked about that, Powell suggested the level for that metric consistent with a balanced labor market might be close to 1-to-1, about where the measure was in the late 2010s. While it has inched off the high of 2.0, the ratio ticked back up to 1.9 in September, still far from levels that the Fed would like to see.
Exhibit 2: Ratio of Job Openings to the Number of Unemployed
The JOLTS seesaw
Since June, the JOLTS job openings figures have gyrated back and forth, repeatedly confounding expectations (Exhibit 3). The initial job openings reading slid below 11 million for the first time in nine months in June. This came at about the same time that real GDP had just posted a second consecutive negative quarter and fit with the narrative that the economy was weakening rapidly in the face of higher interest rates.
The Bloomberg economist consensus called for a further moderation of 300,000 in July. Instead, the June reading was revised upward by 300,000, and the July level was higher from there by another 200,000, adding up to an 800,000 upside surprise. Then the August reading sank sharply, a million below consensus. Economists expected the September reading to fall further. Instead, for the second time in three months, the job openings measure jumped, on top of an upward revision to the prior reading, creating another upside surprise of close to 1 million.
Exhibit 3: JOLTS job openings surprises
Given the level of volatility in recent months, it is perilous to draw too much from any single JOLTS job openings reading. That being said, the fact that the measure has broadly held at levels far above anything seen prior to the pandemic supports the view that the labor market is moderating but only gradually. The preliminary September reading is only lower by 300,000 from the June figure. If job openings fall by only 100,000 a month, it will take several years to get back to pre-pandemic levels. A gradual slide in job openings is consistent with my outlook that the unemployment rate will remain near current levels for quite some time, perhaps as long as a year or more, before rising to levels that the FOMC would associate with a more balanced labor market.