These indicators indicate that the Federal Reserve has no reason not to cut interest rates in September!

When deciding whether, when, and by how much to cut interest rates in the future, the Federal Reserve must make a key judgment: whether the possibility of inflation re-accelerating is greater, or the risk of a sharp decline in the labor market is more painful.

Based on the data released this week, one thing should be very clear, that is, the job market in the United States is cooling down, and the Federal Reserve is well aware of this.

Looking at most of the indicators historically used to measure the strength of the labor market, for job seekers in the United States, although it is not a bad period now, the situation is indeed becoming less favorable. From the current supply and demand situation in the job market, there is no threat of labor shortage leading to a spiral of inflation. "With the downward trend in inflation, the labor market is showing slower growth, data is falling, and there is almost no reason for the Federal Reserve not to cut interest rates in September," wrote Peter Williams, an economist at 22V Research.

However, analysts have different views on which indicator should be used to assess the actual performance of the U.S. job market. Compared to the job vacancy rate commonly used in the past, analysts seem to think that it is more important to observe the resignation situation of employees now.

Job vacancy rate drops to pre-pandemic levels

The ratio of job vacancies to unemployed persons is now lower than in February 2020, before the pandemic. But some analysts are cautious about this indicator.

On the one hand, the longer the economic expansion lasts, the greater the likelihood that job growth comes from people who were not even looking for work last month, rather than from the ranks of the unemployed. So, experientially, calculating the denominator of the job vacancy rate (i.e., the number of unemployed persons) is not a good measure of potential labor force.

In addition, some analysts point out that job vacancies are not the best indicator of labor market tightness, as the addition of new positions by employers is not necessarily related to changes in the labor market. It's like a zero-cost call option that employers can use when looking for talent. In each economic cycle, the ratio of job vacancies to unemployed persons reaches new highs. This indicates that either the labor market is structurally tight, or over time, the number of vacant positions posted by companies exceeds the actual need.

However, the resignation situation can explain many issues. Generally, employees only resign when they find new job opportunities and higher salaries. Confidence in the labor market conditions in the United States is deteriorating. A survey by the U.S. Chamber of Commerce shows that the gap between respondents who believe jobs are plentiful and those who believe jobs are hard to find is narrowing, a measure that is usually inversely related to the unemployment rate.

Both resignations and hirings are decreasing The resignation rate in the private sector is 2.3%, much lower than the pre-epidemic level; the recruitment rate in the private sector is closer to the low point of 2020, rather than the level in February 2020 (understood as pre-epidemic). This is still a low-flow labor market, with a very low dismissal rate as well. However, the risk lies in the fact that if economic growth further slows down (this seems more likely to happen without a rate cut), layoffs and dismissal rates are more likely to rise than recruitment rates.

The resignation rate is often a good leading or synchronous indicator of wage growth. This week's Employment Cost Index shows that the annual growth rate of wages and salaries in the private sector (excluding incentive pay positions) in the second quarter fell to 4.1%, the slowest growth rate since 2021. The Federal Reserve believes that this is the best indicator to reflect wage pressure.

"Considering the decline in the resignation rate, I doubt there is further room for slowing down wage costs in the coming quarters," wrote Justin Bloesch, head of U.S. economics at Renaissance Macro Research. "Currently, the right tail of inflation has been trimmed, and the risks of growth and inflation are both biased downward."