Premarket stocks: Why America’s job market hasn’t imploded

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CNN Business
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Despite a stock-market bounce in October that gave the Dow its biggest monthly gain in more than 45 years, economists are warning that there’s a very real danger of recession in the United States. Mortgage rates are at their highest levels since 2002, consumer spending and business investment is falling and the Federal Reserve is fighting persistent inflation with higher interest rates.

But somehow, US labor markets have bucked the trend. The unemployment rate is 3.5%, a five-decade low. Demand for workers is strong. There are currently 1.7 job vacancies for every unemployed American.

We’ve got all the ingredients for a downturn and yet companies keep hiring.

What’s happening: New data this week will likely show that there were 10 million job openings at the end of September in the United States. That’s about the same as in August and still far greater than the 7 million openings pre-pandemic.

Labor costs have also grown at a rapid clip as employers increase salaries and benefits to attract and retain employees. US employment costs grew by 1.2% in the third quarter, according to Labor Department data released last week.

“While job openings should continue to fall in the months ahead, the fact that they remain well above normal levels should continue to support strong job growth, possibly all the way into 2023,” said David Kelly, chief global strategist at JPMorgan Funds.

The job market is good for workers but it’s not good for inflation. The mismatch between demand for hires and the supply of workers is keeping wages elevated and protecting Americans from a slowdown just as the Federal Reserve is working to cool the economy and limit demand.

High employment numbers signal to the Fed that they must continue their aggressive rate hike cycle to temper inflation. That further increases borrowing costs and slows growth.

What’s different: History shows us that when the Fed tightens, employment drops: During periods of high inflation in the 1970s and 1980s, tightening by the Fed led to unemployment rates of 9% in 1975 and 10.8% in 1982.

The Fed’s own projections find unemployment rates should rise to 4.4% by the end of 2023, nearly a percentage point higher than where they stand now.

The problem is that this time around, the shape of the job market is different. Employers are less concerned about layoffs and more concerned about their ability to fill open positions. So they’re hoarding workers and holding off layoffs, just in case.

Vice Fed Chair Lael Brainard said earlier this month that “businesses that faced significant challenges finding and retaining qualified workers following the pandemic may be more inclined than in past cycles to retain rather than lay off…