The biggest factor that could break the stable labor market: Morning Brief

In his most recent press conference, Federal Reserve Chair Jerome Powell characterized the labor market as "broadly stable."

And in this week's lead-up to the January jobs report, the incoming data that shows little turnover suggests the labor market is holding along with the Fed.

This dynamic can be seen across a swath of labor market data. The unemployment rate, which had risen throughout the start of 2024 and been a point of concern among economists and equity strategists, has been at or below 4.2% since July.

The ratio of job openings to unemployed workers has been around 1 to 1 since the summer too.

And even the quits and hiring rates, which are below their pre-pandemic levels, have held in a tight range over the past several months.

In other words, the labor market is far cooler than the "Great Resignation" days of 2022, but there haven't been any clear signs of rapid deterioration. Things are both healthy — and undramatic.

Still, the looming question is how long this dynamic can last. Typically, as labor markets cool, they don't just stop in a "stable" range. They keep cooling until a recession comes and the cycle starts over.

But recessions don't simply come from old age. And when asked what could upset the current labor market, ADP chief economist Nela Richardson said inflation could be the culprit.

"In order to keep this labor market turning, prices and inflation have to stay well anchored to expectations," Richardson told us. "Remember, leisure and hospitality is doing a lot of heavy lifting still in this labor market. So if we see any softness around the consumer, if we see any spikes in inflation, then we might see it carry over into the labor market."

To Richardson's point, in ADP's January National Employment Report released on Wednesday, the "service-providing" sectors, which are more directly consumer-facing, added 190,000 jobs. The "goods-producing" sectors, which include areas like manufacturing, actually lost 6,000 jobs in the month. Meanwhile, leisure and hospitality, part of the service-providing sector, added 54,000 jobs.

As Richardson noted, this paints a picture of a "consumer-led hiring market." Great since the consumer is strong, but also vulnerable should inflation remain high and keep weighing on American wallets.

This dynamic comes at a peculiar moment for the inflation story too. Recent data has shown price increases slowly decreasing after moving sideways for most of the fall. And now, economists are increasingly worried about the possibility of Trump's tariff policy muddling the inflation outlook and potentially keeping the Fed from cutting interest rates any further at all this year.

That impact of restrictive policy could cause its own issues for the jobs picture too, as higher interest rates are often associated with weighing on the labor market. Though, perhaps that should be taken with a grain of salt for now, given the slowdowns projected from higher rates that never arrived over the past two years and the various recession indicators that flashed red only for the labor market to keep chugging along.

Still, the concept of consistently higher prices being the potential spark for a labor market downturn many thought would come much sooner sends an important reminder to investors at the start of 2025.

While the inflation outlook is proving increasingly uncertain, its direction nevertheless remains at the core of any discussion about the trajectory of the US economy.