The week in review
- The trade deficit narrowed to $70.7Bn from $80.9Bn
- The ISM Services PMI edged up to 56.9 from 56.7
- The Composite (Mfg+Svcs) PMI fell to 44.6 from 45.0
The week ahead
- August CPI and PPI
- Preliminary Sept. Consumer Sentiment
- Retail Sales
Thought of the week
As economic growth slows this year, a key question for investors is whether job openings can fall from their historical highs without a substantial rise in unemployment. This relationship between job vacancies and unemployment is captured in the Beveridge curve—a downward sloping curve shaped like a skateboard ramp. In expansionary periods, job vacancies tend to be high while unemployment is low and the labor market moves up the steep part of the curve. During recessionary periods, unemployment is typically high while vacancies are low, and the labor market slides back down to the flat part of the curve. Meanwhile, changes in the efficiency of the job matching process will shift the entire curve outward or inward—which seems to characterize the post-pandemic recovery. Large shifts in demand patterns, child care challenges, pandemic aid and job reallocation toward industries that support remote work and away from in-person services have all likely contributed to a decrease in job matching efficiency.
As the Fed seeks to cool an overheating labor market to ease wage pressures, our position on the steep part of the Beveridge curve implies that vacancies can fall a good deal without a significant rise in unemployment, increasing the odds of a soft landing. However, the outward shift of the curve also underscores new challenges in job matching in the post-pandemic economy. If this is the case, vacancies may be unlikely to drop much further without a substantial increase in unemployment. In the meantime, tight labor market conditions due to scarce labor in certain industries and regions could keep wage growth elevated and cut into profits in those sectors.
