This Week’s Developments in the US Economy

Market Views: Are Moderation and Unevenness the New Normal?

Despite concerns about the potential for an economic slowdown, the labor market continues to grow at a moderate pace—still strong but slower than the rapid pace of the past few years. Job growth, while helpful in understanding the economic outlook, can also provide insights into how various sectors are performing, and in turn highlight markets with greater exposure to these sectors. Further, stability in labor market dynamics might also signal lower migration rates, which could reduce volatility in consumer-driven sectors such as retail and housing.

Payroll data highlight a trend towards normalcy with decelerating hiring rates and fewer layoffs, and the current easing in the labor market represents a return to normalcy several years after massive dislocation. Key indicators, such as the quits rate, have declined to a three-year low from a high of 3% in mid-2022. Both are well below long-term averages from prior cycles, resulting in slowing labor turnover. Additionally, as fewer people are changing jobs, the declining ratio of openings to unemployed individuals suggests that employees might be more cautious about switching jobs, fearing difficulty in finding new positions. Analysis across different sectors indicates varying degrees of recovery towards pre-pandemic employment levels, reflecting both general normalization and sector-specific adjustments.

Markets Benefiting from Fast-to-Recover Industries May Face Headwinds Amid Rebalancing

Some labor sectors recovered more quickly than others post-pandemic. Transportation & Warehousing and Information sectors reached pre-pandemic employment levels in 8 and 17 months, respectively. Since January 2020, they have maintained annualized growth rates of 3.5% and 1.3%, higher than the overall employment growth rate of 0.9%. Up until early 2023, both sectors were outperforming overall employment in year-over-year growth. However, in the second half of 2023, both experienced negative employment growth and a decline in monthly job openings, indicating possible rebalancing after their rapid post-pandemic recovery. In our view, markets with meaningful exposure to these industries may face challenges ahead should deceleration continue.

Markets with Slow-to-Recover Industries Balance Growth Against Cyclical Risks

Markets with greater exposure to slower-to-recover industries may experience sustained demand, but their cyclical risk could decrease potential tailwinds.

Leisure and Hospitality, and Mining and Logging sectors continue to grow as they have not yet reached pre-pandemic employment levels. Over the past two years, their employment growth has been stable and exceeded total employment growth. Their growth suggests potential for further expansion towards pre-pandemic levels. Notably, Mining and Logging show significant wage growth at 5.9%, indicating a tight labor market in this sector.

Acyclical industries such as Private Education & Health Services and Government experienced prolonged recoveries, taking about three and four years, respectively, to return to pre-pandemic employment levels. Both sectors have seen an upward trend in year-over-year employment growth, outperforming total employment growth by the end of 2022 and mid-2023, respectively. However, Education and Health Services currently exhibit the lowest wage growth at 2.5%, indicating a more relaxed labor market in this sector.

What We Are Watching

The moderation in labor market growth is not uniform across sectors, and the potential implications for demand are likely to be seen in the balance between growth and risks across different regions. We see strong relative values in markets with greater shares of Private Education & Health Services, and Government as both are large employment drivers with lower relative cyclical risk, and likely to contribute stability to the markets in which they are most prominent.