The US labor market is getting less hot. The pace of job growth has steadily slowed from 444,000 per month in the first half of the year to an average of 289,000 per month in the last three months. At the same time the pace of nominal wage growth (adjusted for industry-level composition changes) slowed from an annualized pace of 4.5 percent in the first half of the year to 3.8 percent in the last three months. Nevertheless, the labor market remains very hot: The unemployment rate remains around its fifty-year low and other labor market indicators, like job openings and quits, are highly elevated.
In October, employers added 261,000 jobs. The household survey was somewhat weaker than the payroll survey, as the unemployment rate ticked back up to 3.7 percent, the same level as in August, and the labor force participation rate continued to edge downward. Hourly wage growth was faster in October, growing at a 4.2 percent annual rate (once adjusted for industry-level composition effects) while average hours remained flat. Averaging over the past three months, however, hourly wage growth showed more signs of cooling, falling to a 3.8 percent annual rate. This pace of wage growth is consistent with an underlying core personal consumption expenditure (PCE) inflation rate of around 4 percent, well above the Federal Reserve’s target.
The Pace of Employment Growth Continues to Moderate
The economy added 261,000 jobs in October, again coming in above analysts’ expectations (figure 1). Job growth has continued to slow from its extremely fast pace in the second half of 2021, but even this more modest pace remains very strong relative to more normal periods. At an average of 289,000 jobs over the past three months, recent job growth has been much faster than the approximately 54,000 jobs pace needed to maintain October’s age-adjusted employment-to-population ratio and well above the 198,000 jobs per month pace in the year before the pandemic.
Despite the robust pace of recent job growth, the economy had been expected to continue to add jobs throughout 2021 and 2022, so the economy is likely still missing jobs relative to where it would have been absent the pandemic. Relative to the Congressional Budget Office’s (CBO) January 2020 projection (adjusted for slower than expected population growth), there were 0.6 million fewer jobs in October than were expected.
Unemployment increased back to 3.7 percent in October, but continues to be very low, just above its pre-pandemic level. While the unemployment rate rose in October, the employment rate and labor force participation rate both worsened slightly as well, with each falling by 0.1 percentage point.
The Recovery in Employment Has Not Been Even Across Industry Sectors
As shown in figure 2, the strength of the jobs recovery has varied widely across industry sectors. While the information, financial, and professional and business services sector has added over 1.3 million jobs since February 2020, employment in other sectors remains well below its pre-pandemic level. The accommodation sector, for example, has 363,000 fewer jobs than in February 2020, a decline of 17 percent while food services and drinking places have lost another 565,000 jobs. Employment also remains low in the education sector, where reports of teacher shortages were widespread earlier this year.
Despite the large increase in information, financial, and professional and business services jobs, in some sense, this increase is only what was expected (or perhaps even less than expected). Employment in this sector was growing very quickly in the two years before the pandemic. If that pace had continued, employment would have been 181,000 higher in October 2022 than it actually was. Employment in the healthcare sector has surpassed its pre-pandemic level, but it remains well below what it might have been if its pre-pandemic pace had continued. Only in the transportation and warehousing and retail trade sectors has employment growth kept up with its pre-pandemic pace. And in the case of the retail trade sector, employment had been falling in the leadup to the pandemic.
The pre-pandemic trend does not represent a true counterfactual for what would have happened to employment in each industry absent the pandemic, since overall employment growth had been expected to slow. However, it does help put the substantial job growth in the transportation and warehousing and information, financial, and professional and business services sectors into context.
Labor Markets Continue to Be Very Tight
The labor market continues to show signs of substantial tightness, but several indicators suggest that the tightness may be starting to ease. In recent months, both the unemployment rate and employment rate for people ages 25-54 have been little changed, while the quits rate and openings-based measures have fallen somewhat from recent highs. Overall, in September there were 1.9 job openings for every unemployed person, a slight rebound from August as job openings increased. Based on the increase in unemployment and the change in job postings data from Indeed, it is likely that number fell to 1.8 in October (official openings data are not available for October).
While different measures of labor market slack seem to agree that the labor market has not been getting much tighter, they still tell very different stories about the level of slack in the labor market.
The prime-age (25-54) employment rate and the unemployment rate remain slightly below their respective levels in February 2020, as shown in figure 3. For the unemployment rate, however, if the natural rate of unemployment has risen since the pandemic, similarly low levels of unemployment could indicate a meaningfully tighter labor market now.
Despite falling somewhat in recent months, the quits rate (for September, the most recent month available) is still much tighter than anything on record. And the high level of job openings suggests that labor markets are even tighter.
The Pace of Nominal Wage Growth Remains Consistent With Inflation Well Above the Federal Reserve’s Target
Nominal average hourly earnings adjusted for industry-level composition changes grew 4.2 percent at an annual rate in October (figure 4). This is faster than in the past two months, but it is still slower than earlier in the year. The change over the past three months, 3.8 percent at an annual rate in October, continued to fall. While this level of nominal wage growth is much lower than the 6.0 percent annual rate in the second half of 2021, it is still faster than normal. In the two years before the pandemic, this wage measure grew at a 3.1 percent annual rate.
Earnings for production and nonsupervisory workers rose somewhat faster than those of all workers at a 4.4 percent annual rate both in October and over the past three months (also adjusted for industry-level composition changes).
Based on average hourly earnings growth, and other measures of wage growth, including the Employment Cost Index, hourly compensation in the nonfarm business sector, and the Atlanta Fed Wage Tracker, recent wage growth has been consistent with core PCE inflation of about 4.5 percent (table) although different indicators tell different stories.
|Wage growth and implied core PCE inflation, Q3 or October 2022|
|Recent wage growth||Core PCE inflation consistent with recent wage growth|
|ECI, Wages and Salaries, Civilian Workers||5.6||4.8|
|ECI, Wages and Salaries, Private Workers Excluding Incentive Paid Occupations||5.2||4.4|
|Hourly Compensation, Nonfarm Business Sector||4.2||2.9|
|Average Hourly Earnings, Private Workers||4.6||3.7|
|Average Hourly Earnings, Private Production and Nonsupervisory Workers||5.1||4.0|
|Atlanta Fed Wage Growth Tracker*||6.5||5.1|
|ECI = Employment Cost Index; PCE = personal consumption expenditures|
|*6-month/2-quarter change for all series except for Atlanta Fed Wage Growth Tracker (12-month change). For periods ending 2022Q3 for hourly compensation, September 2022 for ECI and Atlanta Fed, and October 2022 for Average Hourly Earnings.|
|Note: ECI, Wages and Salaries, Private Workers Excluding Incentive Paid Occupations and Average Hourly Earnings, Private Workers are extended prior to March 2006 using ECI, Wages and Salaries, Private Workers, and Average Hourly Earnings, Private Production and Nonsupervisory Workers, respectively.|
|Sources: Bureau of Labor Statistics, Bureau of Economic Analysis, and Federal Reserve Bank of Atlanta via Macrobond; authors' calculations.|
The labor market shows that in a very important respect the real side of the economy remains strong. Although the 1973 recession coincided with strong job growth, the demographic situation was very different then, and today the labor market looks very far from recessionary in the first ten months of the year—in fact, it has been closer to an unusual boom than a recession.
The flip side of this, however, is that nominal wage growth remains at a pace that makes it unlikely for inflation to come even within one percentage point of the Federal Reserve’s target. It is possible that prices will slow even without nominal wages slowing. It is possible that nominal wages will slow without the unemployment rate rising. But neither of those are a reasonable best guess for the future of the economy.
The data underlying this analysis are available here [zip].