Labor Data May Be Cause for Caution

Jun 12, 2024

With the U.S. labor market sending mixed signals about the economy’s health, investors shouldn’t overlook the risk of recession.

Lisa Shalett

Key Takeaways

  • Investors sent bond yields lower and stocks higher, as signs of labor-market cooling fanned expectations for a “soft landing.”
  • However, markets seem overconfident in this outcome and may be overlooking more mixed signals about the economy’s health.
  • If the labor market normalizes back to pre-COVID conditions, any further decline in job openings could quickly push up the unemployment rate, weighing heavily on consumer spending and GDP.
  • Given the uncertain outlook, focus on portfolio diversification, considering non-U.S. investments and real assets.

A recent softening in U.S. economic data, including an apparently cooling job market and slower consumer spending, has driven a significant decline in interest rates: The 10-year Treasury yield has fallen about 20 basis points since the end of May, while the 2-year yield fell about 10 basis points.


The stock market’s kneejerk reaction has been to rally to new highs, based on heightened expectations for Federal Reserve rate cuts and confidence in an economic “soft landing” in which growth slows and inflation eases.


Morgan Stanley’s Global Investment Committee believes markets may be overconfident in this outcome, however. Recent data continue to paint an unclear picture of where the economy is headed, especially when it comes to the labor market. Investors who hope that a cooling job market will bring down interest rates may be overlooking the fact that a job market that cools too quickly could tip the economy into recession.

Labor Market: Cooling Down or Heating Up?

Markets were encouraged by the Job Openings and Labor Turnover Survey (JOLTS) data for April, which showed declines in the number of job openings and the quits rate. This suggested a cooling labor market.


But the May non-farm payrolls report told a different story: U.S. employers added a forecast-topping 272,000 jobs, even as the jobless rate rose to 4%, its highest level since early 2022. In addition, wage growth re-accelerated to 4.1%, yet another sign of upward pressure on prices and a risk to corporate profit margins.


With such mixed data, it’s hard for us to share the market’s apparent faith in a soft landing.

Reasons for Caution

A closer look at the JOLTS data suggests the labor market may not simply be cooling, but could be quickly normalizing back to pre-COVID conditions, raising the specter of a recessionary “hard landing.” Consider:


  • Job openings are now below their 20-year trend.
  • The hiring rate is down to 3.6%, compared with an average of more than 4% over the past few years.
  • The ratio of job openings to job seekers is down to 2019 averages.
  • The quits rate has declined to levels in line with those of 2016-2019.


If these normalizations hold to historical patterns, any further decline in job openings could quickly push the unemployment rate straight up and weigh heavily on consumer spending. That matters because spending powers about two-thirds of U.S. gross domestic product. Currently, with lower-income consumers running out of excess savings and maxing out on credit, spending may increasingly depend on a healthy job market.

Implications for Investors

With such an uncertain outlook for the labor market and the broader economy, our recent recommendations hold: Investors should focus on portfolio diversification and active stock-picking, looking to companies with quality cash flows and achievable earnings targets. Investors can also consider the use of “call” options on the CBOE Volatility Index (VIX) and “put” options on the S&P 500.


Consider non-U.S. investments and real assets—such as gold, real estate investment trusts (REITs), master limited partnerships (MLPs) and commodities—as potential portfolio diversifiers. It may also be prudent to increase portfolio allocations to investment-grade credit.


This article is based on Lisa Shalett’s Global Investment Committee Weekly report from June 10, 2024, “A Labor Market in Balance?” Ask your Morgan Stanley Financial Advisor for a copy. Listen to the audiocast based on this report.

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