The U.S. labor market has followed the Fed’s blueprint for a soft landing, with labor supply increasing and demand for new workers easing without layoffs. But further weakening is likely needed to sustainably ease inflationary pressures, and Citi Research’s analysts aren’t convinced we've seen those signals yet.
They warn that the past year’s rebalancing seems to have stalled without wage inflation returning to a level consistent with underlying 2% price inflation. And they say they are not convinced by many of the indicators often cited as early signs of labor market weakness.
Exploring the labor supply
The Citi Research report starts by looking at the labor supply. In October, the participation rate was 62.7%, slightly above the higher end of the authors’ springtime expectations. That increase has been largely due to foreign born workers, with a rise in that population substantially offsetting the natural aging of the native born prime-age population. Essentially, they write, the increase in the foreign born population since late 2020 has made up for a contraction during the pandemic. But there’s likely limited scope for foreign workers to give overall participation another boost from here, they say.
Participation rates of prime-age and younger workers have already returned to pre-pandemic levels or even a bit above, so further upside is by no means assured.
The most obvious upside, the authors note, would be for prime-age participation to continue along an upward trend that formed before the pandemic, with prime-age women’s increasing participation a key factor. The total participation rate would increase if prime-age participation continued to rise in line with that trend, returning to pre-pandemic levels by mid-2025. Recent increases in participation by workers aged 16 to 24, on the other hand, are unlikely to persist and would depend on dynamics such as a continued downward trend in college enrollment.
Signs of weakness?
The report says that dire conclusions about the labor market’s health haven’t played out over the past year, but adds that some emerging dynamics may be early warning signals. Job growth has been consistently strong, with payrolls rising by more than 200,000 a month, on average, in 2023. That implies both a demand for workers to fill open jobs and a supply of those workers. Job openings remain elevated in the range of 9 million to 9.5 million.
Job openings could remain elevated around 9-9.5 million