In the Markets Now: Labor Day Labor Market Update
As we do every Fall, we are taking the Labor Day holiday as an opportunity to look at some key indicators in the U.S. job market, the health of which will be critical for how the coming year develops.
A Quick Run-Through of the U.S. Job Market
The most important story in the U.S. economy is the transition from a tight labor market to a looser one. A tight labor market – too few workers, too much demand – puts upward pressure on wages, and, usually, consumer prices. And while the labor market was far from the only source of our recent inflation scare, the Federal Reserve still identified wage pressure as a key catalyst and responded by raising interest rates. That largely worked. Job creation has moderated, wage growth is falling, and, critically, inflation seems under control. But now, the shoe is on the other foot. If the labor market loosens too much under the weight of high rates, unemployment (and recession odds) rise. We examine this precarious balance below.
The unemployment rate has risen, setting off some recession alarms. But the unemployment rate can rise for multiple reasons. If it is rising because the labor force is growing (you must be looking for work to be “unemployed”), that’s not necessarily a bad sign. If it is rising because layoffs are up, that is. Layoffs remain low for now, but should be watched closely.
The BLS lowered their estimate of the number of jobs added in the year ending Mar. 2024. The new estimate shows solid job creation, but the huge revision calls into question the labor market strength that underpinned the Fed’s decision to as of yet not cut interest rates. The market expects 3-4 rate cuts by year-end, but it seems clear that the Fed is behind the curve.
Wage growth for non-management employees has fallen from record levels, but remains historically high. This drives consumer spending, but can also result in inflation if employers offset higher labor costs with higher prices. Improving worker productivity (output per hour) could allow wages to remain elevated without stoking inflation. A.I. might help on that front.
Perhaps the most critical question facing an economy is, “how efficiently are you employing working-age people?” In the U.S., the answer is (still): historically well. Wage growth and job market confidence drive consumer spending and, thus, economic growth. The U.S. economy is far from perfect, but a near-record level of job market participation is a great sign.
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