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Why the US labor market is 'stabilizing': Economist

The latest JOLTS data (Job Openings and Labor Turnover Survey) shows some resilience in the labor market as job openings increase. Deutsche Bank chief US economist Matthew Luzzetti joins Market Domination to give insight into the latest jobs data and what it means for the labor market, housing, and equities moving forward.

"I think if you look at this morning's JOLTS data, you mentioned job openings were higher, actually the hiring rate had picked up, the quits rate has stabilized at somewhat lower levels over the past six months. But all that together does suggest that after softening over the past six months or so, you're seeing a labor market that is stabilizing at this point in time. For Friday, we expect that you see jobs added about 200 - 225,000. The unemployment rate remains steady at 4%, but actually risks that that could round down to 3.9%," Luzzetti tells Yahoo Finance.

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

New job openings unexpectedly rising in May topping economists expectations.

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The new data is showing a resilient labor market ahead of Friday's full jobs report.

Joining us now is Matthew Litti Deutsche Bank Chief us economist Matt.

It is good to see you.

Um Le let's get right to your take, Matt.

I'm what you think is coming on Friday morning with that big jobs report.

I it was interesting, Matt, I don't know if you saw Nick Tim Roe, uh his latest comment, the journal.

Um it was a good one and, and the way sort of, um Nick kind of framed, it was interesting as a question he sort of asked, you know, is the labor market in this sustained equilibrium where the unemployment rate kind of settles out around 4% or no?

Uh We keep softening, resulting in recession.

I'm interesting.

Matt, how, how you think about that question?

Yeah, I think anytime you have kind of a slowing in the economy that's taking place, uh There's always a question about the trajectory, are we slowing to something that's more worrying, you know, stalling out in the economy or perhaps even a recession or is it going from a very robust growth uh environment that we had last year back down to just something that's far more normal.

I think it's definitely the latter.

Um I think if you look at at this morning's jolts data, you mentioned job openings were higher.

Actually, the hiring rate had picked up.

The quits rate has stabilized at somewhat low levels over the past six months.

But all that together, it does suggest that after softening over the past six months or so, you're seeing a labor market that is stabilizing at this point in time for Friday.

We expect that you see jobs added about 202 125,000.

Uh the unemployment rate remains steady at 4%.

Uh but actually risk that that could round down to 3.9%.

They see average hourly earnings or wage growth uh firm again at 0.4%.

And I think if we get that data point, it will alleviate some of the concerns uh around the, the idea that the labor market be could be cooling too much.

Ma'am.

My question to you is a as we have seen some of these softer econ prints here as of late discounting the, the Jel report out this morning.

But we have seen weakness in housing manufacturing also coming in a bit weaker than expected earlier this week.

What does that tell us just about your confidence here?

Are you still confident that we are going to see a soft landing and be able to avoid a recession.

Yeah, it, it's still our baseline.

You're right, you are seeing some slowing in the data.

Um A lot of this was anticipated uh for for, for quite some time.

Uh on the manufacturing side, you know, the ISM manufacturing index was a little bit softer than expected.

But actually, if you look at new orders relative to inventories, it's showing that we should, we should have good uh growth momentum in the manufacturing sector.

And that's actually a similar signal that we got from the PM I data uh this week as well.

I think there's gonna be a lot of focus on the consumer as we look ahead.

Obviously, there's a lot of interplay between the consumer and the labor market.

But if we continue to see a labor market that turns out meaningful income growth, uh something that we actually saw in the personal income report last week, it's really hard for me to see a reason why with, with very high wealth meaningful income growth for, for consumers, why the consumer should slow in a worrying way.

And matt when we talk about the consumer, of course, you know, there's, there's different consumers, high income, middle income, low income.

Do you ever read on kind of how each is, is doing right now and what you see ahead?

Yeah, no doubt.

I, I think you have a lot of heterogeneity in the consumer experience at this point in time, you know, that is being driven in part by the drawdown in excess savings that we've had, particularly at the bottom half of the income distribution.

You're seeing certainly some strains or stresses showing up showing up there with, with higher delinquency rates.

You know, on the other side, if you look at the upper half of the income distribution, uh higher income households, they're benefitting from, from very high uh uh house prices from, from equities that are near record record levels.

The fact that they're locked in the low mortgage rates kind of insulates them from, from higher interest rates at this point in time.

And the labor market is still chugging along here, you know, despite the slowing that we've seen, so there is definitely some divergences uh in the data that we're seeing.

I think importantly though from an aggregate or macro perspective, you know, which is what the Fed will be most focused on at the moment, it looks like a consumer that's slowing just to more comfortable levels rather than something uh that is that is either stalling out or or recessionary at this point.

So the Mac given that and also just the commentary from Fed Chair Jay Powell earlier today, I'm curious just to get your perspective on what this tells us about that first rate cut because he didn't explicitly say or give us any hints on the timing.

But when you take into account what he is saying or what he did say, the fact that the labor market is cooling, the fact that he is uh very much encouraged by some of the progress that we have seen on inflation.

What does that then?

Tell us?

Just do you think about the odds of a cut in September?

Yeah, our baseline is that you uh get one cut this year and then it happens in December.

But you know, there are certainly some prospects for, for September rate cut that can come in one of two ways that we get better inflation data over the next several months.

And as that clip showed, you know, chair pal has been encouraged by at least the last inflation print.

You know, certainly if we get something that looks like last Friday's core PC print over the next several months, the fed could very well cut at the September meeting.

The other way to get to a rate cut is that you have a weakening in the labor market that's unexpected.

Uh That's the area where, you know, that is a downside risk, but it is not part of our baseline at the moment.

Um From Chow's comments this morning, I did, you know, sense a little bit of a dovish tone to that, you know, he was encouraged by the inflation data.

He's certainly looking at a labor market that is coming into much better balance.

Uh and is not a an important source of inflation at this point in time.

And so really, they'll be data dependent, you know, essentially if they get very good inflation data for the next few months, that will certainly improve the prospects for a September rate cut.

Uh Matt, you know, election is front and center, that means tariffs are front and center as well.

Biden and Trump have both both embraced that.

Uh I'm just interested as an economist.

How you think Matt about that policy tool?

Do you think it's smart?

Do you think it's effective?

What, what's the potential impact on the economy?

Matt?

Yeah, I think from an impact on the economy perspective, it really matters.

Um kind of the breadth and size of those, those tariffs, you know, certainly we've seen um President Biden embrace that to a certain extent, but it's been quite narrow on things like imports of electric vehicles from China.

The proposed tariffs from the potential Trump administration are much broader, they're much higher.

Um He's thinking in contemplating a 10% universal baseline tariff, that's a 10% tariff across the board contemplating 50 to 60% tariffs on imports from China that would have a, a meaningful macro impact.

And so, you know, as we think about the Federal Reserve in particular over the next year, December and then into next year, uh the election outcome will be important for how much they cut rates.

And if we get an election outcome that promises fiscal stimulus via via tax cuts uh and inflationary policies through, through tariffs.

It will be less likely that the fed cuts rates immediately next year.

Matt, great to have you on today.

Thanks for helping us kick off the show.

Appreciate it.

Thanks for having me.