A cooling job market could help to ease inflation

Workers attach siding to a house at a new home construction site in Trappe, Maryland, on October 28, 2022. Rising interest rates could mean slowing job growth in construction and manufacturing.
Workers attach siding to a house at a new home construction site in Trappe, Maryland, on October 28, 2022. Rising interest rates could mean slowing job growth in construction and manufacturing.
JIM WATSON/AFP via Getty Images

The U.S. job market is still tight, but perhaps not as tight as it has been.

A report from the Labor Department Friday is expected to show that employers added about 25 percent fewer jobs in October than they did the month before. Analysts say a decline in job growth is not surprising, since employers have already replaced all of the 22 million jobs that were lost during the pandemic.

A cooling job market could even help the Federal Reserve to achieve a so-called "soft landing," if it contributes to slower inflation without tipping the economy into recession.

"A gradually slowing job market means that a soft landing is still possible," said Daniel Zhao, lead economist at the job search website Glassdoor. "As long as the unemployment rate remains low, a soft landing is not off the table."

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The unemployment rate in September was 3.5 percent, matching a half-century low. Forecasters think October's rate will remain at or near that level.

The Federal Reserve has been surprised by the strength and resilience of the labor market, despite a slowdown in the overall economy. Employers added nearly 3.8 million jobs in the first nine months of the year, even as the nation's gross domestic product barely budged.

Federal Reserve chairman Jerome Powell cautions that even with some slowdown in job growth, the labor market remains unusually tight.

"It's a mixed picture," Powell told reporters this week. "I don't see the case for real softening just yet."

Posted job openings rebounded in September, after dropping the month before, so there are once again nearly two vacant jobs for every unemployed worker.

"The labor market continues to be out of balance, with demand substantially exceeding the supply of available workers," Powell said.

As a result, employers have to pay more to attract workers. While wage growth has eased slightly in recent months, wages are still climbing faster than inflation watchdogs would like.

Powell said he and his colleagues have not seen signs of the kind of wage-price spiral that fueled runaway inflation in the 1970s. But they're not taking any chances.

"Once you see it, you're in trouble," Powell said. "So we don't want to see it."

Rate hikes creeping in

The Fed has been aggressively raising interest rates in an effort to tamp down demand and curb inflation. That's led to slower growth in industries that are sensitive to borrowing costs, such as construction and manufacturing.

"We're seeing the signs of some of the Fed's rate hikes creeping in," said Nela Richardson, chief economist of the payroll processing firm ADP. "I think these would be early signs that that policy is having an impact."

Companies experiencing a drop in customer demand may be slower to fill job vacancies or to replace workers who quit. But layoffs are still rare. Weekly claims for unemployment benefits, which tend to track with layoffs, remain at historically low levels.

After struggling for two-and-a-half years to find enough workers, many employers may be reluctant to let anyone go, even when business declines.

"I have a sense from talking to some CEOs that they are hanging on to people," said Esther George, president of the Federal Reserve Bank of Kansas City. "And their argument is, it is so hard to re-hire — [after] the experience we've had — that we'll be inclined to hang on to some of these positions. We will wait as a last resort, really, [before] releasing people."

Employers may be hoping that any downturn will be brief, and they don't want to be short-staffed when business picks up again.

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