The labor market isn’t collapsing—but it’s weakening. And the Fed may be reading the wrong schedule.
KEY TAKEAWAYS
The labor market is weakening, not collapsing
Companies are in a no-fire, no-hire phase
AI is accelerating creative destruction in jobs
The Fed may be waiting for lagging confirmation
Employment trends are more fragile than headlines suggest
MY HOT TAKES
The Fed risks acting too late if it waits for layoffs
AI is driving a Schumpeter-style creative destruction in the labor market
Hiring freezes matter more than headline job losses
Inflation still matters, but employment trends matter more right now
The Fed’s old playbook may not fit this cycle
You can quote me: “Waiting for layoffs to confirm weakness is like waiting for a building to collapse after the foundation cracks.”
Weekend schedule. Not a fan of public transportation? I get it, it can be challenging sometimes–if not outright frustrating. Of course, I am writing this blogpost/note in America where the 3-car garage was invented, but where I reside and work, public transportation is simply unavoidable. Have you ever studied a subway, train, or ferry schedule and tried to optimally plan a trip only to realize that you were looking at the “weekend” or “holiday” schedule? It’s basically a modified schedule with less run times and less stops. A pain in the behind really. Have you been confused with the labor market recently? Don’t worry, you're not alone.
Let’s start by getting something out of the way. My long-term followers know that I often joke about the market's obsession–addiction–to rate cuts. I sometimes ask traders why they want rate cuts so badly only to watch them struggle to come up with a real answer other than “I want my stocks to go up.” Ok, it’s obvious that markets react positively to rate cuts, I get it. When I ask some more “sophisticated” portfolio manager friends the same question, they often quote finance 101’s time value of money, where lower discount rates (derived from yields) increase the theoretical value of stocks. I love that one. It’s mathematically correct, but really, at the end of the day, a stock’s price is determined by the market and most financial wizards find creative ways to make the math match the market along with their oft-biased hopes. But let’s be real, lower interest rates are generally associated with good things. Cheaper capital is a very real thing. Companies–AND sovereigns are happy to spend less interest on debt. Consumers like you and me are happy to get more house, car, or [FILL IN YOUR FAVORITE HIGHER COST DURABLE GOOD HERE] for our monthly payment in a lower interest rate environment.
This morning, I don’t want to write a long treatise on stock selection–I have plenty of those buried in my blogs or video collection. No. Let’s just say in the interest of parsimony–and don’t kill me for being so basic–solid fundamentals, effective management, and a bullet-proof growth thesis are the essentials for upside. But there is something else–the economy! Companies–good and bad–can only thrive in a healthy economy. Healthy economies are driven by consumption (it makes up ⅔ of GDP). Healthy consumers need to be confident and have the funds to…er, consume. Those funds come from employment and investments. You know my favorite saying: “confident consumers consume,” and my favorite footnote that “employed consumers are confident.” I have to add that “consumers with gaining portfolios are confident.” So, it’s fair to say that low interest rates are good for employment as well as for confidence, despite the very real math that is behind all of that.
So, it is no wonder that heads of state since the beginning of time would prefer lower interest rates for too many reasons to list here. We all get that. President Trump has not been shy in his desire to have lower interest rates and has become quite creative in pursuit of said. I am not going to spill any ink on that very current news item other than to say that–despite what the President wants–the Fed really does need to step up its game. I understand that inflation is above “target.” I also understand that the average rate of inflation going back a long, long time happens to be closer to 3% than 2%. Go figure. That said, goods inflation is certainly increasing, albeit slowly, and services inflation is sticky but receding, albeit slowly as well. So, mandate No. 1 for the Fed requires focus, but not necessarily action. Mandate No. 2–full employment–clearly requires more than just focus. One does not need a doctorate in finance to see the very clear trend of a weakening labor market. I carefully said “weakening” and not collapsing. Let me ask you a question. If you were standing on the street and you noticed a building’s foundation start to crack with big chunks starting to fall off, would you wait until the building started to collapse to evacuate the building? You don’t have to answer that.
Folks, the numbers tell us a story that is quite clear. Companies right now are in a “no-fire / no-hire” state. This chapter–I like to remind you often–is the one which typically precedes the one which includes layoffs. The Fed may be waiting for that chapter to start before it brings rates down out of the restrictive zone, through the neutral zone, and possibly into the stimulative zone. It’s what they do. That is the Fed’s tried and true playbook–data dependence. But what if the delineation between chapters is not so clear? What if we are witnessing an economy in transition? A labor force in transition?
20th century economist Joseph Schumpeter has an interesting take on all this. Schumpeter’s core doctrine reveals that capitalism isn’t a static machine–it’s an organism that grows by killing off its own obsolete parts. This "creative destruction" means the labor force doesn't just drift; it gets ripped apart as entire job categories are rendered useless by radical innovation. Workers find themselves in a violent transition where legacy skills are devalued overnight to make room for the new economic order. It’s a brutal rewiring where the displacement of the old guard is the literal fuel for the next wave of growth. In this model, the labor market is in a constant state of flux, reallocating human capital from the graveyard of the past to the frontier of the future. That’s some colorful language to describe why the railroads made horse-drawn mail coaches obsolete.
Now, I know that I am drifting into some abstract economic theory here, but if you have been paying attention, an image should be forming in your mind right now. That mail coach is the modern-day spreadsheet–once itself an agent of radical change (when I first started on Wall Street some 36 years ago 😳)--and the railroad is… you guessed it, Artificial Intelligence. Forget about all the headlines and robots doing dances on stage. AI is already changing the way people work and that has companies in a state of flux. Do they need more workers or can the same number of workers accomplish the same level of productivity augmented by AI? Do existing workers have the necessary skills in AI to get that next-level productivity? AI is evolving and advancing so fast, is it possible that the type of worker needed is itself a moving target? If you are a hiring manager in a company, how would you react to this rapidly changing environment?
We are witnessing a classic, Schumpeterian, creative destruction phase and the ground zero for that destruction is in the labor market. Will it completely collapse? Probably not, but these current conditions certainly don’t portend a strong labor market. On that note, let’s not forget that the custodian of the labor market in the US is none other than the Federal Reserve. I know that it may be difficult for FOMC members to avoid getting obsessed with the notion of tariff-driven inflation, even though Fed policy can’t help with supply-push inflation. I also know that it may be difficult to avoid the ridiculous jawboning going on right now. But, if FOMC members took a step back and looked at the trends, they would find it hard to justify inaction.
Folks, I just want to end with a quick statement. An independent Fed is critical to the long-term economic success of the US. Don’t trifle with the Fed. Full stop. Ok, now, to you my friend, my message is, don’t get caught up in the noise. The trends are clear, the transition is very real and it is happening. Hopefully the Fed realizes soon that it's looking at the weekend schedule, or worse yet, that its old playbook may be becoming as obsolete as the mail coach.
YESTERDAY’S MARKETS
Stocks rallied yesterday despite a rocky start as traders weighed the political firestorm around the DOJ x Fed brinksmanship. Traders, instead focused on earnings season which starts later this week, and with it, high hopes of continued growth. Not all companies participated in that rally; credit card companies got hammered after the President suggested interest rate caps. Bond yields inched higher in response to the political drama and the possibility of a bigger deficit.
NEXT UP
Consumer Price Index / CPI (December) came in at 2.7% as expected, same as the prior print. The core YoY print was less than expected at 2.6% and the same as the prior read.
New Home Sales (October) may have slipped by -10.6%.
ADP NER Pulse (December 20th) showed the 4 week average job additions at 11.75k, slightly above the prior week’s 11.0k.
Fed speakers today: Musalem and Barkin. Both are known hawks.