US labour market: limbo dancing

Please note: This article is more technical in nature than our typical articles, and may require some background knowledge and experience in investing to understand the themes that we explore below.

Key points

• The health of the US labour market is an important driver of the economy, especially consumer spending and the likely path of inflation rates
• Strangely, despite a steep hiking cycle and already being seven months at peak rates, labour market momentum has barely budged. This helps to fuel hopes that the US central bank may be perfecting a rarely achieved ‘no landing’
• After a post COVID-19 pandemic period when more workers jumped to a different job to boost their pay, employers now seem to be gaining the whip hand as this becomes rarer
• The US economy may look in good shape for now, but investors may want to keep an eye on momentum in the labour market for signs that point to a downturn

The US economy has surprised investors time and again since the COVID-19 pandemic struck in 2020. The labour market has been especially resilient amid the US Federal Reserve’s (Fed) interest rate hiking cycle. In combination with a generous fiscal stimulus, this has kept US consumer spending healthy. 

This article assesses the current health of the US labour market and attempts to infer whether the economy might end up perfecting the limbo: getting inflation below the bar without knocking the economy into a downturn.

US momentum in limbo

A glance at our momentum indicators for different aspects of the US economy shows that it is very much in limbo. Not only economic activity but also labour market dynamics have been accelerating or decelerating very little. 

This unexpected, almost eerie balance fuels the narrative of a “no-landing” scenario – a rhetoric used to describe a case where central bank monetary tightening manages to “land” inflation close to its target range without disrupting the economy.

US momentum in limbo

Macroeconomic momentum Indicators for different aspects of the US economy since last March show relatively little movement. Those numbers highlighted in blue (red) suggest acceleration (deceleration) in momentum over the previous three months, compared to that seen the last six months

Most clues to the severity of an eventual landing of the economy seem to lie in the labour market. From a theoretical point of view, it should be the mechanism through which central banks eventually rein in inflation: by putting more workers out of a job or lowering their bargaining power and taking away purchasing power.

But the shape of the US economy also points the way for the labour market: it is first and foremost driven by a gargantuan domestic market. Not only is it large in absolute terms, but it is also bloated when compared with other countries. 

At the end of 2023, close to 70% of gross domestic product (GDP) came from personal consumption. To put this into an international context: in the UK, consumer spending accounts for 63% of GDP, while in Japan it only accounts for 54% of GDP. This gives the US some resilience to economic crises abroad, but also makes it all the more reliant on the health of its labour market. 

Construction employment proves resilient

Since rates were last hiked in August, our measure for US labour momentum has barely budged. In comparison, the six months after the previous hike, in 2006, were characterised by slowing labour momentum as well as weaker consumption dynamics. Usually, it is the construction sector which feels the effects of rate hikes most directly as mortgage costs increase. 

History shows that a one percent increase in the federal funds rate has been associated with 0.5% fewer workers in the US construction sector over the following 1.5 years. 

However, there is a lot of variation (see chart). If real estate is in the crosshairs, such as witnessed during the global financial crisis, construction sector employment can be hit much harder. However, currently construction sector employment is holding up well.

Construction sector resists rate-hike drag

Employment in the US construction sector following the final rate move of the last six hiking cycles (excluding 2019). Index, month of last hike = 100

The labour market is still running smoothly

The chart above also suggests that eventually rate rises catch up with construction employment. Does this mean that an overall downturn is inevitable? Not necessarily: construction only employs 5% of the US workforce. To gauge the susceptibility to a downturn, let’s look at the US labour market as a whole.

One interesting gauge for labour market stress is the ratio of job quits over layoffs and discharges. While inversely related to the unemployment rate (see chart), the ratio also hints at the bargaining power and mood of workers. 

While the unemployment rate has hardly moved since 2022, the number of (voluntary) quits for every job loss has decreased from 3.5 to just over two. The latter reading is still high by historical standards, but it is not the workers’ paradise of post-COVID labour hording anymore.

Employers are regaining their bargaining power

The unemployment rate (LHS) and the more volatile ratio of job quits over layoffs and discharges, from the US Bureau of Labour Statistics’ Job Openings & Turnover Survey (RHS)

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