Mind the Gap: What Does the Quits Rate Tell Us?

The Bottom Line at the Top Line

A tight labor market in healthcare and social assistance could bolster wages in these sectors, putting pressure on margins. But overall, job openings in higher-paying roles are moderating as the labor market has shown signs of cooling. As long as the job market is stable, the soft-landing narrative appears likely as consumers will have some capacity to spend. However, a strong labor market will make the Federal Reserve’s (Fed) job more difficult in their efforts to get inflation closer to their 2% target.

Key Points

• The quits rate can serve as a measure of a worker’s willingness to leave a job, and rates are disparate across sectors.
• Quits rates in healthcare jobs are still elevated, suggesting wages have more upside in this sector to keep workers happy.
• The churn in construction jobs is higher than normal, as employers still find it difficult to keep workers on the payroll.
• The openings to unemployed ratio, a favorite metric of Fed Chairman Jerome Powell, is unchanged from the previous month and matches pre-pandemic ratios.
• Hiring is strongest in the South and weakest in the Northeast, which has important ramifications for the housing market in these regions.

What Do We Know About the Labor Market?

The job market may be at an inflection point, but so far, everything appears stable. The number of workers employed part-time for economic reasons is at pre-pandemic levels; the openings rate is still elevated, and layoff announcements are unseasonably low. However, other metrics appear more concerning. Here are a few key takeaways from the recent Job Openings and Labor Turnover Survey (JOLTS).

Mind the Gap

Despite the tone-deaf nod toward the Brits on the eve of Independence Day, investors should “mind the gap” in the quits rate across sectors and across time. The May quits rate, the quits level as a percent of employment, has fallen in recent months back down to pre-pandemic levels and the hiring rate fell below pre-pandemic averages. Investors need to dig below the headlines and tease out the information under the surface, since quit rates vary by sector, and reveal underlying trends in the job market.

Quit rates can serve as a measure of a worker’s willingness to leave a job and do something else. When the labor market was tight and job openings were unusually plentiful, quit rates were high, but that is no longer the case. In fact, some sectors have quit rates below historical averages — take the leisure and hospitality sector as an example.

The churn in the leisure and hospitality sector is generally higher than other sectors, as restaurant and hotel workers are quicker to move to another job than workers in most other sectors. However, labor churn is decreasing overall as the economy slows. The chart below illustrates the quits rate in most sectors is lower now than the pre-pandemic average. A lower quits rate implies workers are less confident about finding another job. However, churn in healthcare and social assistance is higher than average. Quit rates in healthcare jobs are still elevated, suggesting wages have more upside in this sector to keep workers happy. The churn in construction jobs is also higher than normal, as employers still find it difficult to keep workers on the payroll.

Lower Quit Rates Imply Worker Hesitation

Source: LPL Research, Bureau of Labor Statistics 07/02/24

Why the Delay in Rate Cuts?

The labor market is still stable, giving the Fed more time to hold rates steady. Layoff announcements are low as firms generally have more openings than people available. However, one aspect to monitor is the number of firms announcing layoffs based on weaker economic conditions.

In recent speeches, we heard Fed officials say job market conditions are key to the future path of interest rates, and we should expect conditions to materialize later this year for the Fed to begin cutting rates.

Job Cut Announcements Are Low, But Rising

Source: LPL Research, Challenger, Gray & Christmas 07/03/24

Summary

Markets have a lot to digest in the coming months, with the potential ramifications of an uncertain presidential race at the top of the list. Labor markets are also nearing an inflection point as some indicators suggest a slowdown in hiring. However, the U.S. equity market is entering the second half with impressive momentum. Despite some signs of slowing economic growth, primarily at the consumer level, earnings remain impressive. In some sectors like healthcare, labor costs could increase in the near term, putting some pressure on profit margins. Easing inflation pressures point to a potential rate cut from the Fed later this year. Technically, the S&P 500 remains in a bull market and above its long-term uptrend, but overbought conditions — especially in technology and semiconductors — and notable divergences in market breadth, point to a potential short-term pause or pullback in this rally. Seasonality data suggests dips should be bought, as the S&P 500 tends to finish higher in the second half, especially after a strong first half.