Job openings fell in March as the labor market softened

REAL ECONOMY BLOG | May 02, 2023

Authored by RSM US LLP

Job openings fell to 9.6 million in March from almost 10 million in February, a clear sign that the labor market is softening as the economy slows down.

Still, there were 1.6 openings available for each unemployed worker on the month, down only slightly from 1.7 in February, according to data released Tuesday by the Labor Department.

That level of openings continued to suggest a significant gap between demand and supply inside the labor market; the pre-pandemic average was around 1.2 jobs per unemployed worker.

Of course, the drop in labor demand, which helped narrow the labor imbalance, was welcome news for the Federal Reserve as it meets this week.

We do not expect the job openings data will steer the central bank away from a 25-basis-point hike on Wednesday. That likely increase was pretty much sealed by the strong inflation and employment cost index data released last week.

But the slowdown in labor demand and spending demand should give the Fed more reasons to announce a strategic pause as early as tomorrow’s news conference by Chairman Jerome Powell. 

Labor demand is not that strong

There will be some concerns on how elevated labor demand will continue to pressure wages higher and keep inflation elevated. But we have been making the case that the strong job openings number might not reflect the “real” level of labor needed given the economic situation we have experienced.

The so-called real labor demand should be much lower than what the data is suggesting because of a number of factors.

First, a high turnover rate with the quit rate hovering above 2.5% has kept companies on the offensive side when it comes to hiring. March’s quit rate was 2.5%, down from 2.6% in February.

The short-term problem during the pandemic with severe labor shortages means that many companies are still in the mindset of hoarding labor rather than letting go their employees too early.

Second, as we laid out a year ago in a study, we don’t think current spending and excess savings can sustain the elevated level of labor demand. Now, with new evidence, the surge in spending has proven to be short-lived compared to historical standards, forcing many companies, especially in tech and real estate, to announce mass layoffs after having added a large number of employees during the pandemic.

[Read more: Commercial real estate is high among bankers’ ongoing debt concerns]

The current level of job openings is still reflecting some of that excess labor demand, not from larger companies but smaller ones, which often lag behind and struggle more when it comes to attracting workers.

The takeaway

We won’t be surprised if we see a significant drop in job openings in the second half of the year when the economy, as our forecast suggests, tips into a recession.

That should favor a final rate hike this week but maybe not any cuts this year. We can see underlying inflation falling to 3% given the current economic conditions. But if the Fed is determined to go back to its target of 2%, a premature rate cut should not be in the picture anytime soon.