United States: Will the labor market adjustment accelerate?

■ As the job vacancy rate approaches 1.00, labor supply and demand are nearly balanced, and the unemployment rate may increase more quickly in the future.  
■ Although full employment persists, an increase in long-term unemployment is also observed, serving as an early sign of worsening employment conditions. 
 
    Last month, the Fed revised its forecast for the US policy interest rate outlook, continuing to expect a more aggressive rate cut than the projections of FOMC members. This article will explore the background of the assumption that "the adjustment of the labor market will accelerate further," as well as the current state of the US labor market. 
 
    Due to the tight monetary policy of the US Federal Reserve (FRB), labor supply and demand are adjusting, easing the high excess demand for labor. The job vacancy rate (the number of job openings per unemployed person), which reflects labor market conditions, exceeded 2.00 times in 2022 but has been decreasing since. The latest data (April: 1.03 times) indicates a level close to the 1.00 threshold where supply and demand are balanced. As the vacancy rate declined from over 2.00 times to about 1.00, the unemployment rate increased from 3.5% to 4.2%, yet remained near the estimated natural rate of around 4%, since labor demand was still higher than supply. With the basic balance between labor supply and demand, if the vacancy rate continues to decline due to falling labor demand, it is more likely to trigger an increase in unemployment. Based on historical relationships between unemployment and vacancy rates before COVID-19, and the supply-demand adjustment mechanisms, the unemployment rate is expected to rise more rapidly if the vacancy rate falls below 1.00. However, this view assumes a return to pre-pandemic relationships—"the unemployment rate rises faster when the job vacancy rate falls below 1.00." If labor supply and demand structures have shifted post-pandemic and the natural unemployment rate increases, this relationship may also change. 
 
    Currently, there are no clear signs that US tariffs or immigration policies have disrupted the labor market. The “Sahm Rule” recession indicator (May: 0.27), which previously surpassed the recession threshold (0.50) last summer, and the Michez Rule indicator (May: 0.30, corresponding to a 1.9% recession probability), which assesses recession risk based on unemployment and vacancy rates, are not signaling a recession at present. *2 The current unemployment rate is below the Michaillat/Saez estimated full employment unemployment rate (FERU, May: 4.29%), indicating that the US remains in full employment. Layoffs (April: 1.786 million), which typically increase sharply during a recession, have remained fairly steady, with no significant employment adjustments so far. However, more recent indicators show that the number of people claiming unemployment insurance (the four-week average of 1.941 million as of June 14) has risen to its highest since November 2021, with the growth rate accelerating since May. The rise in long-term unemployment is seen as an early warning of a deteriorating employment situation. If this trend persists, it will further support the author's view that "labor market adjustments will accelerate."