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

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.