Uncertainties in the Labor Market are Increasing

Developments in the US Labor Market

The US labor market has become one of the biggest uncertainties in the economy. The government's closure has entered a two-month period, marking the longest duration in US history. This situation has put investors and government officials in a precarious position. There is no access to important data such as job reports and JOLTS figures, which does not provide a clear understanding of how hiring, wages, and participation rates are evolving.

Private and survey data have partially filled this gap, showing that while the labor market is still resilient, it is slowing down. Betsey Stevenson, a professor from the University of Michigan and a former member of the Council of Economic Advisers, stated, "Hiring has dramatically slowed." Stevenson added, "If you have a job, that's great; but if you lose it, you're in a tougher spot than you were two years ago."

This warning is quite close to recent private data. According to ADP figures, the private sector created 42,000 new job opportunities in October. This is the first monthly gain seen since July, but it is significantly below investors' expectations at the beginning of the year. The strongest hiring occurred in the construction, transportation, and energy sectors. However, professional services and information sectors, which are the main drivers of white-collar employment, experienced job losses.

Hardika Singh, an economic strategist at Fundstrat, stated, "ADP payrolls reported an increase in new job additions last month. However, this increase does not primarily come from AI-related sectors, which is somewhat surprising as investors expect AI advancements to support economic growth." Singh added that while corporate profits have benefited from AI-driven efficiencies, the situation for workers is different.

Layoff rates are rising, indicating a cooling in the labor market. Challenger, Gray & Christmas recorded over 153,000 layoff announcements in October. This is the worst result for that month since 2003. The company cited reasons such as cost-cutting, AI adoption, and overemployment during the pandemic.

Since the beginning of the year, companies have announced a total of 1.1 million layoffs, marking a 44% increase compared to 2024. The technology and retail sectors are leading in layoffs, with significant announcements from firms like Amazon (AMZN), Target (TGT), and UPS.

All these situations show that while the labor market is solid, it is far less dynamic compared to a year ago. While workers continue to hold on to their jobs, companies are cautious, and trust in the economy is continuously eroding.

The latest survey from the University of Michigan found that consumer confidence dropped to 50.3 in November, marking the lowest level since 2022. Survey participants expressed their concerns about the government shutdown and rising prices. Participants with more stock reported a stronger sense of confidence; this underscores the nature of the K-shaped recovery, where market gains largely flow to wealthy households.

Stevenson remarked, "Rising inflation and a slowing labor market serve as a recipe for a truly concerning economy." She added, "No one wants to live in an economy where a small number of elites thrive while the majority struggle with what they have." This discomfort has become a topic of focus for policymakers, who are now trying to assess the health of the labor market without traditional indicators.

Yung-Yu Ma, Chief Investment Strategist at PNC Asset Management Group, stated, "The central bank lacks good data. ... Its feeling is one of a slowing labor market." Describing private data as a "mixed bag," Ma noted, "We're in a challenging environment without the best data." However, he also mentioned that the central bank might interpret the latest trends as a signal that the labor market is weakening and may keep the door open for potential rate cuts when the data becomes available after the government reopens.

Markets seem to be accepting this situation. As of Friday afternoon, investors had priced in about a 70% probability of an interest rate cut in December.