⚠️The economy's danger zone

Hey hey, happy Monday!

Last week was a rough one in markets, mainly because Wall Street soured on the job market after a disappointing report and a stoic appearance from Jay Powell.

I’m here to give you the level-headed, data-based analysis you need in the wild world of hyperbole. But bear with me this week — this post is a little longer and nerdier than usual.

Also, if you have a friend freaking out over the stock market or the economy, send them my way 😊 

The job market is the central nervous system of our country.

When people earn money, they’re more likely to spend that money. And Americans are the best in the world at spending money – consumer spending makes up 70% of our nation’s economic output.

In 2022, when inflation soared, the housing market froze over, the manufacturing sector seized up and market-based recession indicators screamed for mercy, the economy continued to grow.

Why? Because 80% of prime-age Americans had jobs. Workers had the upper hand in negotiating pay raises and flexible work arrangements. And in turn, we blew their paychecks on expensive little treats like Taylor Swift tickets as we collectively healed from the COVID-era trauma. The environment felt awful, yet we never changed our spending habits.

A thriving job market provides a sense of security in our daily lives.

The opposite is true, too: when the job market breaks down, we feel it all around us.

On Friday, the latest jobs report showed unemployment is climbing and companies are cutting back on hiring.

While the report wasn’t disastrous, it was concerning enough for some to believe we’re in an economic crisis.

Crisis is a strong word. I’m not ready to go there yet.

But I’ll admit that something clearly changed in the collective psyche last week.

We’ve entered the economy’s danger zone.

Job market analysis is like Disneyland for nerds.

There is so much data available on every facet of the job market – from unemployment, to job openings and quit rates for any industry you could imagine. Any question you have can be answered with a little digging and Excel work.

So after about three days of analysis, I feel confident saying this:

The job market is breaking, but it’s not completely broken yet.

This is evident in most job-related data. More people are filing for unemployment benefits and fewer jobs are available compared to a year ago.

But while the trend is moving the wrong way, the levels of hiring and unemployment still look OK.

Friday’s report showed that companies added 114,000 jobs in July – slightly lower than the 180,000 in average job growth we saw in the 2010s. First-time claims for unemployment benefits are just 0.1% of the total workforce, much lower than what we’ve seen at the start of other recessions.

People have pointed out that the unemployment rate has risen for four straight months, the first time that’s happened in 15 years. And while that’s technically correct, it’s not for the reasons most think.

Unemployment can be good and bad. Good unemployment ticks up when people feel encouraged enough by hiring prospects that they start looking for a job. Bad unemployment is what we typically think about – people who’ve lost their jobs either temporarily or permanently.

The latest rise in unemployment has come from labor force growth, not layoffs. Bad unemployment has barely budged – in fact, it’s around the lowest in three decades. 

I won’t go too far down the data rabbit hole, but know this: the economy is not in crisis.

At least not yet.

The data is black and white. But the danger zone becomes more evident when we start painting in shades of gray.

First of all, it’s hard to know when an economic crisis will hit until you’re already in one.

The job market can collapse quickly, too. History tells us as much. Layoffs start to pile up, and workers can’t find another job easily. The unemployment rate shoots higher without much warning.

If layoffs were to increase in this environment, we could find ourselves in trouble. Job openings are dwindling quickly, and people have had increasingly tough times finding a new job. Hiring in white-collar jobs like tech and finance has nearly ground to a halt.  Interest rates have made the economy extra vulnerable to other problems, too.

The real danger, though, lies within the intentions of the Federal Reserve – the group of academics in DC tasked with balancing inflation with employment.

The Fed decided to keep interest rates high after a policy meeting last week. Fine, I get that. But when Fed chair Jay Powell spoke to reporters, he said about fifty times in his press conference that it wasn’t time to cut rates because the job market is “strong, but not overheated” and the group wasn’t fully confident inflation is under control.

This is where the Fed lost the plot. 

The job market may not be in a crisis, but Friday’s data confirmed it isn’t strong by any means. I don’t know about you, but my friend group texts and TikTok feed are both full of layoff horror stories. The number of “help wanted” signs around Charlotte have started to dwindle, while the “for sale” signs are taking over empty buildings. 

Anecdotes can be misleading, but in the job market’s case, they may be accurate. Small businesses account for about 55% of the economy’s total jobs, and they’ve felt the biggest impact from higher rates.

An unemployment-led crisis can be especially pernicious. People lose their jobs, their portfolios, and their sense of identity all at the same time. It’s the kind of crisis that can leave scars for generations.

Wall Street isn’t freaking out because of the jobs data. The angst transcends numbers in a spreadsheet. When there’s a problem in the central nervous system, you don’t mess around. The core of the economy – and many Americans’ sense of security – is at stake.

We’re not there yet. And you shouldn’t let the danger zone paralyze you.

However, you should start thinking through what you would do if the stock market fell 20%. Or if you were to lose your job. While these are scenarios you should always have in the back of your head, they became a little more real over the past week.

There are still plenty of reasons to feel hopeful about the future, and I think the Fed has enough time and capacity to help mend some of the job market’s cracks through lower rates.

But the path ahead may be shakier than you think.

Thanks for reading!

Callie

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