Economists and some Federal Reserve officials are increasingly on alert that pain could be on the horizon for American workers amid signs the labor market is losing steam.

Companies are posting fewer job openings this year and employees are quitting less as unemployment has begun creeping up from low levels, signaling the end of the historically-tight labor conditions that characterized the rapid recovery from the pandemic shock.

Strength in hiring has so far helped the economy weather aggressive Fed tightening, which brought interest rates to the highest levels in two decades. With inflation still running above the central bank’s 2% target, the fear is that any further softening in labor conditions could start to snowball and put economic growth at risk.

“Any change in the outlook for the labor market could have significant implications for the direction of the economy and monetary policy,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics. “If there is one thing we know for sure, it is that conditions change very quickly.”

Two key reports this week from the Bureau of Labor Statistics – Tuesday’s monthly update on job openings and Friday’s on broader employment trends – will offer more clues about where the labor market is headed.

Last month’s Job Openings and Labor Turnover Survey release, known as JOLTS, showed total listings for open positions fell in April to 8.1 million, a three-year low. That is down more than a third from the peak of 12.2 million reached in 2022, when employers hampered by labor shortages were struggling to keep up with a surge in demand as the economy reopened.

There are now just 1.2 postings for each person looking for work, similar to pre-pandemic levels. The quits rate, at 2.2% in April, has also returned to levels that prevailed before COVID-19.

Kelly Bonn, a headhunter and executive coach in St Petersburg, Florida, said inquiries from job-seekers asking for help are up about 30% since the end of 2023. Finding a job can often take two to five months now, compared to one or two months in 2021 and 2022, according to Bonn.

“Employers are definitely taking their time and being choosier about who they bring in,” she said. Meanwhile those with jobs have become more wary about leaving stable positions for new opportunities: “They don’t want to be unemployed in this market.”

Fed officials are still mostly sanguine about the state of the labor market, though they’ve begun to acknowledge rising risks.

“Overall, we’re looking at what is still a very strong labor market, but not the superheated labor market of two years ago or even one year ago,” Fed Chair Jerome Powell told reporters on June 12, after central bank officials kept rates unchanged and scaled back projections for cuts in 2024.

‘Inflection Point’

The question some economists are asking now is whether the market is also more vulnerable to a downturn. Goldman Sachs Chief Economist Jan Hatzius recently described it as at a potential “inflection point,” where a further material softening in demand for workers will register in higher unemployment and not just fewer openings.

“Future labor market slowing could translate into higher unemployment, as firms need to adjust not just vacancies but actual jobs,” San Francisco Fed chief Mary Daly said in a June 24 speech. “At this point, inflation is not the only risk we face.”

Monitoring the job market for that potential tipping point has become more challenging in recent months, with different indicators in the monthly BLS report on hiring sending conflicting signals.

On one hand, the data show employers have added 248,000 jobs a month so far this year on average, a robust pace that exceeded economists’ expectations, perhaps in part driven by a surge in immigration.

But the unemployment rate – derived from a survey of households instead of businesses – rose to 4% in May, up from the low of 3.4% reached last year.

“We’re left with ambiguous results and we have to deal with that uncertainty around data,” Powell said on June 12.

Making the moment all the more critical for the Fed is the awareness based on past experience that labor-market losses can pile up quickly once they get going. Unemployment rose gradually from 4.4% in March 2007 to 5.1% a year later, as the economy slowed amid the onset of the financial crisis. As the recession took hold, the jobless rate rose more rapidly, reaching 7.3% by the end of 2008 before topping out at 10% the following year.

So far, hiring and wage growth have remained steady in the data. But the backdrop has clearly shifted. One sign of that: Employers have largely stopped offering the huge incentives they were providing to attract new hires in recent years, said Becky Frankiewicz, North America president at ManpowerGroup, a staffing services company.

“It was almost like, what can we do with the workers to get their attention?” Frankiewicz said. “All of that has really stabilized. Now it’s much more back to base pay.”