Is the Job Market Cooling Off?
A Quiet Shift in the Labor Market that could shake the US Economy
A defining strength of the U.S. economy has been the sheer availability of jobs and the flexibility it offers. Making it relatively easy for people to switch roles or even pivot into new careers without major setbacks In recent times, the job market has been showing faint but discernible signs of strain. According to a recent analysis from EPB Research Services, while headline metrics like unemployment remain low, deeper structural indicators hint at a slowdown. This article unpacks those warning signals, explores their implications for monetary policy, and weighs whether we’re witnessing a temporary blip or the beginning of something more consequential.
Before we dive into the topic of the day, I’ll share a cool and random economic fact of the week. Let’s call these RBI’s (Random But Interesting). These facts will give us useful info, often with a picture or chart to make it clearer. The aim is to help us make smarter financial choices
Random But Interesting (RBI)
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Now, back to our regular scheduled topic:
Headline Job Numbers Mask Underlying Weakness
Despite a seemingly unshakeable headline numbers for the job market, cracks are emerging beneath:
Continued job creation: Non‑farm payrolls remain strong, with three straight months of net gains in job openings, totaling over 8 million. This suggests demand isn’t collapsing (epbresearch.substack.com). Non-Farm Payrolls (NFP) refers to the total number of paid workers in the U.S. economy, excluding farm employees, government workers, private household staff, and employees of nonprofit organizations.
Unemployment rate steady: The jobless rate hovers near 4.0–4.2%, a level many economists associate with full employment. Yet, this stability masks the fact that the labor participation rate (the percentage of work-eligible people in the job market) has been waning.
Revised job numbers: Recent revisions suggest earlier data overestimated gains, signaling a pace of hiring below expectations (kpmg.com).
So while aggregate stats read well, a deeper dive unveils softening dynamics.
Quits Decline: Consumer Confidence Taking a Hit?
Remember the period of the “Great Resignation”? In late 2021/2022, when it was easy to find switch jobs and get a nice raise with that? A core sign of market health is the quits rate (the percentage of employees voluntarily leaving jobs for greener pastures). That rate recently slipped from around 2.1% to 1.9% . This represents a critical shift:
Reduced mobility: Workers are less confident they can replace their job or secure a better one. This is a major contrast to the post‑pandemic mobility surge.
Emerging anxiety: When individuals choose to stay put rather than pursue new opportunities, it's often due to uncertainty.
This subtle change in worker mindset may precede broader labor instability.
Layoffs Climb: Early Signs of Employer Caution
Another telling metric: layoffs are beginning to increase. I typically use DailyJobCuts to monitor the rate of layoff announcements and have seen an increased frequency of notifications in recent months. Though far below recession levels, they are trending higher. Coupled with the quits data, it paints a portrait of companies recalibrating staffing amid shifting conditions.
Sector stress: Manufacturing and lower‑wage sectors, such as leisure and hospitality, are particularly exposed, with job openings contracting even as other industries remain comparatively resilient .
Tariff impact: Trade tensions and rising input cost, driven by steel and aluminum tariffs are squeezing margins and prompting layoffs.
Implementation of AI has made some jobs redundant and companies need to reassess the need for human labor in these roles. This coupled with the slow migration of white collar jobs to lower labor cost countries like India & Malaysia, the incentives to recalibrate US labor concentration is high. We covered this topic in detail in this newsletter post:
Wage Growth Slowing: A Deflationary Signal?
Inflation remains top‑of‑mind, but wage trends are now surprising on the upside for policymakers:
Moderating growth: Average hourly earnings rose by about 0.3% month‑over‑month, a decline from earlier 0.4% gains.
Single-digit annual gains: Despite elevated readings like 3.9% year-over-year wage growth, the trajectory appears to be flattening.
These numbers, coupled with wage bargaining power eroding through fewer quits, may signal cooling inflation pressures.
Labor Participation: Who's Missing?
As mentioned earlier, numbers can deceive. A key reason unemployment remains stable is that fewer people are working altogether:
Participation down: Inactivity among prime‑age workers, particularly older demographic groups, is weighing on the headline stats (kpmg.com).
Retirement trend: Baby boomers are increasingly bowing out. Some early retirement decisions possibly driven by policy uncertainty .
Falling labor force participation thus conceals real weakness.
📉 What it means
A participation rate near 62.4% is slightly below the post-pandemic average (~62.5%) and below the long-term average of 62.8% . This suggests that fewer people are either working or actively seeking employment. For context, each drop of 0.1% represents about 212,000 people dropping from the labor force.
Policy Implications: The Fed’s Tightrope
These dynamics place the Federal Reserve (US Central Bank) at a crossroads:
Pause bias: With wage inflation cooling and layoffs ticking up, there's room for cautious optimism, making further rate hikes less likely .
Threshold test: Despite mixed data, payrolls remain healthy and unemployment stubbornly low (a strong excuse for the Fed to stall its cutting cycle).
Market pricing: Investors see just one rate cut priced in for 2025, but I expect more if labor conditions soften further .
Ultimately, central bankers will watch for sustained softness, particularly in wages and participation, before shifting decisively.
What to Watch in the Coming Months
The next several data releases will be critical for the direction of labor‑driven macro trends:
June & July jobs reports: Payroll trends, quits, participation. All eyes will be on upcoming BLS (Bureau of Labor Statistics) releases.
Unemployment claims: Weekly filings will test if layoffs accelerate meaningfully. Especially in industries tied to tariffs/diversification pressures.
CPI and Fed communication: June CPI, coupled with Fed minutes, will clarify the balance between inflation control and growth protection.
Trade and tariffs: If tariff tensions intensify (e.g. steel import duties) after July 9th (when the pause is meant to expire), the ripple effects could blunt hiring in affected sectors.
In short, the data through summer will determine if the ‘cracks’ widen or heal.
Beneath the strong façade of unemployment rates and job openings lie cautionary signs: reduced quits, rising layoffs, soft wage momentum, and labor force exits. These are subtle trends that warrant careful observation.
History warns that once labor loosenings begin, they often accelerate rapidly. Whether this is just a niche correction or a beginning of broader weakness remains to be seen. For investors, policymakers, and business owners alike, real-time labor data over the next several months will be critical in distinguishing a soft landing from a slippery slope.