In the intricate dance of economic forces, a pressing question emerges: which domino will fall first as interest rates hit a 22-year high? Will it be the job market, or will consumer spending start to wane?
The relationship is quite symbiotic: reduced consumer spending can lead to dwindling profits for companies, making them rethink their workforce, potentially resulting in layoffs. And when companies downsize, it, in turn, curtails the spending power of people.
This year, we’ve witnessed consumers keeping their wallets open, and businesses have been steadily hiring. The challenge, however, lies in deciphering the underlying dynamics of this equilibrium. Economists are divided: some contend that a robust job market fuels consumer spending, while others argue that companies have been hiring thanks to strong consumer demand.
Consumer spending is pivotal in assessing the health and trajectory of the American economy, accounting for about 70% of the nation’s economic output. But determining which side of the equation, spending or hiring, will falter first is a nuanced puzzle.
Several factors muddy the waters. The pandemic has left certain Americans, particularly those with higher incomes, with substantial savings. There’s also pent-up demand for various goods and services that lingers, waiting to be unleashed. Moreover, economic conditions can vary widely from one business cycle to the next, making predictions even more challenging.
The jobs argument posits that the first signs of strain may emerge on the labor front. Shannon Seery, an economist at Wells Fargo, notes, “It’s a little bit of a tough question. It’s never that perfect, but I think the first shoe to drop is on the labor side.”
While the US job market has slowed from its blistering pace in 2021 and 2022, it remains robust. In October, 150,000 jobs were added, a notable drop from September’s 297,000, but still comfortably above the minimum job gains needed to keep pace with population growth. Unemployment remains low, and job openings are at historically high levels.
The concern is that a moderation in the labor market could lead to slower income growth, potentially undermining consumer confidence in job security. As a result, this could dampen spending, creating a ripple effect that might lead to layoffs down the line.
As we navigate this economic conundrum, one thing is clear: the interplay between job market health and consumer spending is a complex and delicate balancing act that will continue to shape the course of the American economy.