As per analysts at BCA Research, despite the recent positive headlines around job creation, it’s too early to declare a decisive turning point in the labor market’s trajectory.
“We assign a 60% chance that the US will enter a recession over the next 12 months, with the downturn likely to begin in the first half of 2025,” the analysts said.
This cautious stance contrasts with the more optimistic projections held by many, reflecting a belief that the labor market’s apparent strength may not be as solid as it seems.
Recent job reports, including a stronger-than-expected September payrolls figure, have spurred discussions of a soft landing—a scenario in which the U.S. economy slows down without tipping into recession.
However, BCA cautions against reading too much into these gains.
The note flags that while headline numbers suggest improvement, deeper scrutiny reveals anomalies, such as irregular seasonal adjustments and weak underlying trends like a declining workweek length and falling aggregate hours worked.
These discrepancies suggest that the labor market could experience reversals in the months ahead.
One of the critical distinctions BCA analysts make is between coincident and leading labor indicators. While payroll growth and unemployment rates—a focus of many reports—remain strong, these are coincident indicators, meaning they often hold steady even as the economy starts to contract. Leading indicators, however, paint a more concerning picture.
BCA points to troubling signs, including weakening employment components of key purchasing manager indexes and a sharp decline in perceptions of job availability, suggesting labor market stress ahead.
Moreover, BCA flags that job openings—a crucial gauge of labor demand—remain an area of concern. Although official data from the Job Openings and Labor Turnover Survey showed a rise in August, the longer-term trend is one of softening.
New job openings on platforms like Indeed have been on the decline, while hiring at large firms has cooled and temporary employment continues to shrink.
These indicators suggest that while companies are not yet engaging in large-scale layoffs, they have become increasingly reluctant to hire, often a precursor to more severe labor market deterioration.
BCA underscores that the future of the labor market will largely hinge on consumer spending. Income growth, which has steadily decelerated, poses a risk.
While disposable income increased by 3.1% year-on-year in August, wage growth has slowed, and the pool of available workers has almost fully reabsorbed those who left the workforce during the pandemic.
Compounding this, high mortgage rates are likely to weaken the housing market further, curtailing residential investment—a reliable early indicator of economic downturns.
In terms of broader economic implications, BCA is cautious about the prospect of a credit-driven spending boom.
Despite recent increases in home equity loan activity, overall consumer credit growth has slowed, with delinquency rates rising across credit card and auto loans.
Banks, in turn, have tightened lending standards, which is likely to suppress consumer spending further and amplify the slowdown in income growth.
To read the full article, Click Here