Labor market shows signs of cooling amid rate hikes

The labor market appears to have lost some of its spark, a development that could influence Federal Reserve policy and further heighten concerns about an economic downturn among investors.

Job openings have been falling since April as rising inflation tightened its grip on businesses and limited consumer spending. In June, openings fell to 10.7 million, their lowest levels since September. Openings are still at a historically high level, never having exceeded 8 million in a month prior to the previous year.

On Friday, the Department of Labor issues its report on July hiring. Economists expect the report to show that employers hired 250,000 workers last month. That would be down from the 372,000 jobs created in June and the smallest increase this year. The unemployment rate is expected to remain stable at 3.6%.

The Fed has been aggressively raising interest rates in an effort to slow the economy and cool the highest inflation in four decades. The central bank raised its key short-term interest rate to the highest level since 2018.

A key concern on Wall Street is that the Fed’s rate hikes could be too aggressive and tip the economy into recession. These concerns weighed on stocks through the first half of the year, but the market rallied in July as investors bet the Federal Reserve might soon slow the pace of rate hikes.

The labor market has remained strong despite inflation checking on the broader economy, with job openings far outnumbering job seekers. A tighter labor market could be a sign that the economy is slowing enough for the Fed to be less aggressive. It would also be a sign that inflation itself, particularly with wages, might be slowing.

“We need fewer job postings, which reduces the chance of bidding wars for talent, and we’re starting to see that,” said Jeff Buchbinder, equity strategist at LPL Financial.

However, it has been a strong job market, which helped offset concerns that the economy is already in a recession. The economy has contracted for two consecutive quarters, which is a long-standing informal definition of a recession, as spending declines. Economists and analysts have said that strong employment has helped protect the broader economy from slipping into recession, or at least from being plunged into a long recession with a deep shock.

“What we have right now doesn’t look like (a recession),” Fed Chairman Jerome Powell said after the central bank’s most recent policy meeting in July. “And the real reason is that the labor market is sending such a signal of economic strength that it really makes you question the GDP data.”

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