The U.S. economy and labor market have proven to be remarkably resilient over the past three years or so. In 2023, economists1 projected that there would be an economic downturn that same year. Instead, inflation started to temper2, wages increased at the fastest pace in decades3, and GDP growth beat expectations4
However, despite many economic indicators remaining solid, the 2024 labor market has shown important signs of cooling. Current trends raise questions about officials’ economic policy decisions, including doubts over the Federal Reserve's approach to monetary policy. Perhaps, most pointedly: Did the Fed keep interest rates too high for too long?
The safest answer is that it’s still too early to tell. However, it’s worth noting that the Federal Reserve’s aggressive rate increases may have lasting consequences for workers. While inflation has largely cooled, recent employment trends suggest the trade-offs of high rates may have dimmed what could have been a truly strong labor market.
The post-2020 surge in prices led the Fed to tighten monetary policy by increasing interest rates. In the somewhat contested5, trade-off between inflation and unemployment, the Fed focused on fighting inflation. As of August 2024, however, the Fed changed course, lowering the cost of borrowing and slashing rates6 by half a percentage point—an aggressive move signaling that Fed officials are reasonably confident inflation is under control andare increasingly concerned about the trajectory of the labor market7
So, what’s been going on with the labor market?
According to recent employment data by the U.S. Bureau of Labor Statistics, on net, the U.S. economy added 159,000 jobs8 in October. While industries like private education and health services, construction, and government saw important job gains over the last three months, other sectors experienced losses. Not only did the manufacturing and professional and business services sectors contract, but both now employ fewer workers than they did at the start 2024.
Historically, goods-producing sectors like manufacturing have been sensitive to economic downturns. When demand weakens, manufacturing is often one of the first to contract, as consumers and businesses scale back on goods purchases. As for the professional and business services sector, it is one of the parts of the economy that is most sensitive to interest rate increases.
At 3.5%, the hirings rate9—a measure that captures the number of hires on a given month as a share of overall employment in the country—is now the lowest it has been since 2014. Perhaps most concerningly, the country-wide unemployment rate has increased so quickly over the last few months that it triggered the Sahm Rule10, an indicator that uses changes in the joblessness rate to predict downturns. The Sahm rule has accurately predicted the last nine recessions.
Yet, by historical standards an unemployment rate of 4.1%11 and a month-over-month increase of about 150,000 jobs reflect solid employment conditions. Claudia Sahm, the macroeconomist behind the Sahm Rule, says that we are not currently in a downturn12, and that her rule should not be taken too literally right now. After all, the post-COVID labor market has defied the historical norm in more ways than one.
As it stands, most labor market indicators point to a still-strong-but-weakening job market. Time, along with new economic data, will reveal whether the Fed acted too late in cutting interest rates, and whether employment conditions will continue to deteriorate. For now, however, there is still a good chance that U.S. policymakers have managed to achieve the proverbial “soft-landing”13 after the 2020 crisis: a reduction in inflation without driving the economy into a recession.