A turning point for the labour market?

13 September 2023

Mark Lister
Has the labour market reached a turning point?

Recently it was Labor Day in the US, a national holiday to honour the American labour movement.

After a very strong few years for the US labour market, there’s plenty to celebrate. Unemployment has been extremely low, wage growth has been strong, and unions have negotiated some historic contracts.

However, we’re starting to see a few cracks appear, which is good and bad for the economy, as well as financial markets.

The headline US unemployment rate has averaged 3.7 per cent over the past two years, falling as low as 3.4 per cent a few months back. The last time it was at those levels was 1969.

Broader measures of unemployment have also declined to multi-decade lows in 2023, with the jobless rate for African American workers at the lowest since measurements began in 1972.

It’s been a similar story in New Zealand, with our unemployment rate declining to 3.2 per cent last year, the lowest since the early 1980s.

This labour market tightness has given workers, particularly those in lower-paid professions, bargaining power they haven’t had for decades.

As a result, wage growth (in both the US as well as here) has been the strongest in at least 30 years.

Despite this, many people are no better off in real (or inflation-adjusted) terms, as this near-full employment has also fuelled inflation and the cost of living.

After this extended period of strength, there are signs the labour market has reached a crossroads.

The three-month moving average of new jobs in the US is still positive, but it’s fallen to the lowest since the height of the pandemic in mid-2020.

The US unemployment rate rose from 3.5 per cent to 3.8 per cent last month, the highest in 18 months.

While still very low, that’s a big increase in just one month.

We’ve also seen the “quits rate” and job creation in the temporary help services category – both reliable leading indicators – trend lower.

Jerome Powell and his Federal Reserve colleagues, who are entrenched in a protracted battle with inflation, will be quietly comfortable with this trend.

To succeed in their efforts, central banks will almost certainly need to see a bit of labour market slack, which is economist-speak for a rise in unemployment.

As heat comes out of the jobs market, wage pressures will ease and keep inflation on a downward trend. This would allow the Fed to reduce interest rates (which are currently the highest since 2001) at some point.

That’s the good news, and it supports the argument that the US is headed for a “soft landing”.

However, it also means we’re entering dangerous territory.

A slightly softer labour market helps our cause, but if things weaken too much, we’ve got problems.

There’s never been a time in the last 75 years where the US unemployment rate has risen 0.5 per cent without a recession occurring.

We could find ourselves facing similar challenges here in New Zealand.

Our next batch of labour market figures are due in early November, but leading indicators suggest it’s getting easier for local firms to find workers, and that wage growth is trending lower.

Just like the US, a turning point in the labour market would have important implications for the path of inflation, interest rates and the economy.

Like the Fed, the Reserve Bank needs to get the balancing act right, and it’s not the easiest needle to thread.

Mark Lister

Mark Lister

Investment Director

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