Does the US labor market signal recession?

Labor force participation is high and rising - that just isn't a recession signal

The US economy has endured a lot of turbulence in the past year. The big puzzle is that this hasn’t weighed on activity. Indeed, the biggest puzzle is the fact that the average tariff rate on imports is up so much, yet private consumption is very strong.

There’s different explanations for what’s going on. First, there’s the possibility that tariff front-running shielded consumers from the tariff shock, but - if that’s the case - growth should be slowing now as inventories of goods get run down. We’re not seeing that. If anything, growth is picking up. Second, there’s lots of focus on the K-shaped economy, the idea that a lucky few are doing well and spending lots, while most are struggling. The problem with this idea is that you need the fortunate few to spend more and more all the time. I just don’t think that’s realistic. All the erratic headlines and geopolitical uncertainty are surely weighing on spending habits of high net worth households too. Third, it’s possible consumers are running down their savings to keep spending. It does look like the personal saving rate has come down somewhat, but - in aggregate - it has not yet turned negative. There’s no aggregate dissaving going on.

The signal from the US labor market is that we’re nowhere near recession. I look at this through the lens of prime-age labor force participation in today’s post. It turns out that this is near record highs across key segments of the population - and rising. There’s really no indication that the US economy is rolling over. If anything, the labor market says activity is picking up.

The two charts above show prime age (25-54) labor force participation rates for men (lhs) and women (rhs). I’m looking at different segments of the population separately, because there’s huge variation in cultural norms, which gets lost when you average things out over the whole population. For example, female participation traditionally is much lower for Hispanics than for the rest of the population. But this is now where some of the biggest gains in participation are being recorded. That flatters the overall picture if we’re looking for a cyclical signal, because this is likely a catch-up effect as cultural norms change.

The picture that emerges from these labor force participation rates is that the labor market is extremely healthy. Participation rates are at historic highs and rising across the board. The only exception to this is labor participation among black men, which is down in recent months. But we’re not seeing a similar fall among black women, which makes me think this is likely noise.