We have sat down yet again and looked at the American labor market to figure out when (and not if) we will get our recession. While employment and unemployment might sound simple at first glance, data providers, analysts and markets apparently all disagree when it comes to how the job market is doing – who’s hiring, who’s firing? Nobody seems to know the true answer. 

The current state of the job market

Everyone is currently back on risk-on as the recent NFP number clearly signals an economy which is far away from a recession. But how can it be that the NFP monthly net change keeps rising amidst banking turmoil, inverted yield curves and an upcoming credit crunch? The short answer is the services sector, which due to its labor heavy nature (which is both more inelastic and sticky than capital and goods) keeps Core CPI and NFP at unsustainable levels for the Fed.

Taking a look at the recent report, it is evident that the services sector is clearly what holds the labor market up, with manufacturing, non-durable goods and tech feeling the heat, which all have reported a net-negative change in employment. 

As we have stated before, there is an almost perfect inverse correlation between real wages and corporate profits during inflationary periods because wage negotiations typically occur with a great lag after inflation skyrockets. And with inflation likely to wane, the services sector might be in for some serious trouble when selling prices drop and their main input cost (labor) rises. Just as resilient as the services job market looks, just as fast it might drop when margins come under pressure.

Chart 1: Recent NFP numbers broken down