The worrying kink in this job openings, unemployment curve

The U.S. labor market looks to be in a precarious balance, in solid shape for the moment but vulnerable to a rapid worsening.

The big picture: That's the implication of the chart above, which captures the relationship between the rate of job openings and unemployment. Based on this historical experience, if employers were to pull back on the number of job postings even slightly, it would coincide with a rapid rise in the jobless rate.

• It helps explain why the Federal Reserve is cutting interest rates even as inflation is elevated and financial markets are booming.

State of play: The relationship between vacancies and unemployment is known as the Beveridge Curve, developed by British economist William Beveridge in the 1940s.

• In 21st century America, the Beveridge Curve has displayed a notable nonlinearity, a kink in the curve. It implies that the labor market could shift relatively quickly from one state to another.

Zoom in: The visual above tells the story. Each dot represents a single month since the year 2000. (The pandemic period is excluded because it distorted economic data so severely.)

• On the left side, the line is mostly vertical. Employers were able to significantly reduce their number of job postings from 2022 to 2024 without generating much of a rise in the unemployment rate.
• But on the right side, the line becomes mostly horizontal. In the horizontal part of the curve, even small cutbacks in job openings coincide with dramatic rises in joblessness.
• In August, both the unemployment rate and the job openings rate stood at 4.3%. As it happens, that's right at the kink in the curve — the spot where the vertical portion gives way to the horizontal portion.

Between the lines: Employers have been cutting back on job postings since the openings rate peaked more than three years ago, with only modest pain for workers. Any further cutbacks in job openings are more likely to hurt.

• The Fed's rate-cutting is a matter of risk management — aiming to lower the odds that unemployment will spike higher.

What they're saying: "By these measures that have been predictive in the past, we look to be fairly close to ending up with some of those nonlinear dynamics," SGH Macro Advisors chief U.S. economist Tim Duy tells Axios.

• "That chart tells you that you could be at this inflection point where if you don't get a floor under the labor market, you could have a big rise in unemployment," he says.

Of note: August is the most recent job openings data available, but private sector sources point to a drop since then. As of Sept. 26, the Indeed Job Postings Index was down 2.5% from a month earlier.

The bottom line: Yes, historical patterns are only that. But if employers cut back on hiring intentions even a little, the benign job market of the last few years could change quickly.