Skip to Content

Beyond the unemployment rate, what do labor market indicators say about the state of the economy?

Labor conditions have eased significantly this year, but many employment indicators are still constructive, only now returning to pre-pandemic levels.

Labor Market data table

Labor market conditions are an important indicator of the health of the economy and are closely monitored by the Fed to gauge the appropriateness of monetary policy. Labor markets that are too tight push wages higher. Higher labor costs are pushed through to consumers in the form of higher prices for goods and services, creating upward pressure on inflation. Conversely, labor market weakness is associated with rising unemployment, slower wage gains, and more cautious consumer spending behavior that can weigh on economic growth or, if significant enough, push the economy into recession.

Although unemployment remains quite low, a range of labor indicators have weakened considerably over the past year as the initial surge in hiring demand has moderated considerably, allowing conditions to move toward normalization. The easing has undoubtedly been partially a byproduct of the natural ebb and flow of the economic cycle, but the Fed’s aggressive rate hikes since early 2022 have also played a role.

While the cooling in the labor market has been notable, most indicators are only now nearing levels consistent with the pre-pandemic economy. As a gauge of hiring needs, job openings have fallen by over 25% since their peak but remain elevated. Job creation has slowed to their pre-pandemic average, and wage growth — while still elevated — has fallen by nearly half from its recent multidecade peak.

The bottom line? If labor markets level off, a soft landing could be in sight. However, a continued deterioration in conditions would at some point have negative implications for the economy and be a catalyst for increased volatility for stocks and other risks assets.

Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.

Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.

Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.

Related Thinking

Barista at a cafe handing a customer their coffees and pastries.
May 24, 2024

Consumer sentiment falls to lowest level in 5 months

Blog 2 min read
Professional looking at a chart of the average excess return over S&P 500 before and after joining top 10
May 23, 2024

How do the largest companies in the S&P 500 index perform before and after joining the top 10?

Blog 1 min read
Professional looking at the GDP report for the first quarter
May 23, 2024

Does the weak GDP report for the first quarter fully reflect the underlying state of the economy?

Blog 1 min read