Schickling: The labor market was a notable contributor to U.S. economic resilience throughout 2023 as robust real wage growth propelled consumer spending. However, trends have begun to emerge that suggest a modest cooling in labor demand and potential vulnerabilities to shocks in certain regions or sectors. Shocks that may have been easily mitigated amid the historically tight labor market of 2022 now have greater potential to cause a material increase, perhaps of a percentage point, to the unemployment rate.
Over the last six months, health care and government have accounted for slightly more than half of all nonfarm employment growth while representing only about a quarter of the overall labor market. This outsized contribution from just two sectors reveals a labor market with more pockets of softness than headline employment growth would suggest.
Although the labor market is usually a lagging indicator, meaning it follows rather than leads the business cycle, there are a few indicators that we believe augur a turning point. These include part-time employment for economic reasons, discouraged jobseekers, temporary help services employment, private-sector job growth, and those unemployed for 15 weeks or longer as a percentage of the unemployed. Another important factor is a more robust recovery in the labor force that brings more job seekers just as job opportunities are growing more slowly. Based on recent movements in these indicators, our model predicts a roughly 60% probability that the unemployment rate will increase throughout 2024, from 3.9% in October 2023 to 4.8% in December 2024.