By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job openings fell less than expected in May, pointing to a still tight labor market that could keep the Federal Reserve on an aggressive monetary policy path as it battles high inflation.

Though a survey from the Institute for Supply Management on Wednesday showed its measure of services sector employment contracted in June for the third time in the last five months, businesses complained they were “unable to fill positions with qualified applicants,” and that “demand for talent is higher.”

The Fed is trying to cool demand for labor and the overall economy to bring inflation down to its 2% target.

“As long as the labor market remains strong, the Fed is likely to keep interest rates moving upward to slow activity down,” said Christopher Rupkey, chief economist atFWDBONDS in New York.

“The data today still argue for a 75-basis-point rate hike later this month rather than 50 basis points.”

Minutes of the Fed’s June 14-15 meeting published on Wednesday showed policymakers expected the jobs market to remain tight, but anticipated “labor demand and supply to come into better balance over time.”

Job openings dropped 427,000 to 11.3 million on the last day of May, the Labor Department said in its Job Openings and Labor Turnover Survey (JOLTS) report.

It was the second straight monthly decline after openings hit a record high of 11.9 million in March. May was the sixth straight month of vacancies in excess of 11 million.

The decrease was led by professional and business services, with 325,000 fewer openings. Vacancies at makers of long-lasting goods fell 138,000, while there were 70,000 fewer unfilled positions in the nondurable goods manufacturing industry.

Vacancies declined in the South, which had experienced an influx of population from other parts of the country, and the Midwest. They were little changed in the Northeast and West.

Economists polled by Reuters had forecast 11.0 million vacancies. The job openings rate fell to 6.9% from 7.2% in April. Hiring was little changed at 6.5 million.

Graphic: JOLTS: https://graphics.reuters.com/USA-STOCKS/byprjagxdpe/jolts.png

The U.S. central bank last month raised its policy rate by three-quarters of a percentage point, its biggest hike since 1994. Another similar-sized rate hike is expected in July. The Fed has increased its benchmark overnight interest rate by 150 basis points since March.

Rising interest rates, inflation and tighter financial conditions have darkened the economic outlook, with consumer spending rising modestly in May and housing starts as well as building permits and factory output softening.

That is hurting business sentiment, resulting in layoffs in the housing and technology sectors. Some technology companies have also been freezing hiring. But worker shortages persist in other industries despite recession fears.

Job openings rose in the trade, transportation and utilities sector in May. Unfilled positions also increased in the leisure and hospitality industry as well as healthcare and social assistance. There were 1.9 job openings for every unemployed worker in May, underscoring the labor market’s tightness.

The job-workers gap fell to a still-high 3.2% of the labor force from 3.5% in April.

“Labor demand is still undeniably hot, suggesting it could take some time to curb excess demand for workers,” said Lydia Boussour, lead U.S. economist at Oxford Economics in New York.

Stocks on Wall Street were mixed. The dollar rose against a basket of currencies. U.S. Treasury prices fell.

SERVICES HUMMING ALONG

Despite the growing recession fears, the economy continues to chug along. A separate report from the Institute for Supply Management on Wednesday showed its non-manufacturing activity index slipped to 55.3 in June from 55.9 in May.

While that was the third straight monthly decline and pushed the index to its lowest level since May 2020, when the economy was battling the initial wave of the COVID-19 pandemic, it beat economists’ expectations for a drop to 54.3.

A reading above 50 indicates expansion in the services sector, which accounts for more than two-thirds of U.S. economic activity. The sector is being underpinned by a rotation in spending back to services from goods.

“The economy is more likely to be muddling through a slow patch than slipping into outright recession,” said Bill Adams, chief economist at Comerica Bank in Dallas.

The survey’s services industry employment gauge declined to 47.4, the lowest reading since July 2020, from 50.2 in May.

That largely reflected worker shortages. Businesses in the survey noted that it was “extremely hard to find truck drivers,” and that “availability of candidates to fill open roles continues to keep employment levels from increasing.”

Graphic: ISM services PMI – https://graphics.reuters.com/USA-STOCKS/egvbkgrldpq/ism.png

Voluntary resignations remained high. About 4.3 million people quit their jobs, little changed from April. Quits have remained above 4 million for 12 straight months, which could keep wage pressure elevated.

Though layoffs and discharges increased by 77,000 to 1.4 million, they remained well below their pre-pandemic average. They were lifted by the wholesale trade industry and federal government.

(Reporting by Lucia Mutikani; Editing by Paul Simao, Chizu Nomiyama and John Stonestreet)

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