INDICATOR: December Job Openings and January Small Business Optimism

KEY DATA: Openings: -364,000; Hiring: +80,000/ NFIB: +1.6 points

IN A NUTSHELL: “The decline in job openings may reflect the reality that growth has moved back toward trend.”

WHAT IT MEANS: That the labor market is strong is seen in the solid numbers of people being hired and the historically low unemployment rate. So, why are job openings on a downward trend?

The Bureau of Labor Statistics reported that the number of openings fell in December to the lowest level in two years. The openings rate, which is the number of openings as a percent of the number employed plus openings, has declined sharply in the past eighteen months.

That said, there are still over eleven percent more openings than the number unemployed, so it is hard to say the labor market is weakening. Hiring, while up a touch in December, it has been fairly stable since May 2018. And the quit rate, which had been expected to rise given all the openings, has also largely remained stable.

Small business owners are one bunch of happy campers, at least that is what they are telling the National Federation of Independent Businesses. The NFIB Optimism Index rose in January and the level is quite high. Hiring plans rebounded, earnings and the sales outlook are strong and owners think it is a good time to invest. In other words, the small business sector is doing quite fine.

MARKETS AND FED POLICY IMPLICATIONS: Fed Chair Powell’s semi-annual report to Congress today made it clear the Fed thinks the economy is in good shape and the Fed is well positioned. But he did say some things that need to be kept in mind by investors.

He voiced his concern about the impact of the coronavirus. Yes, he is watching it carefully, but I am not sure what he thinks Fed policy can do to ameliorate the effects. How can lower interest rates impact something that has nothing to do with economic fundamentals? Would a rate cut really cause businesses to invest more or households to buy more home?

I can only guess he is worried about the equity markets and if he does cut because of an equity market decline (of which there are no signs), then I can conclude that there really is a triple mandate. Indeed, number one on his list would be equity prices, since that was the major reason we got the cuts in rates last year. It surely wasn’t because the economy was faltering or the labor markets were weakening – the two original mandates.

Speaking of the labor markets, why are job openings declining? One explanation is that the job gains are still strong and that is eating into the backlog. There is also the idea that the outlook for growth has come back to earth so firms don’t need as many new workers as previously expected.

Finally, firms now realize they cannot possibly fill all the openings they have so they are getting real in how many they are actively listing.

All three of those explanations indicate that the drop in openings is not a reflection of a softening in the labor market.

Joel L. Naroff is the president and founder of Naroff Economic Advisors, a strategic economic consulting firm.