The 'cracks in the foundation' of the job market are starting to show, economist says—and the big picture is worse than it seems

Despite the U.S. adding 139,000 jobs in May and the unemployment rate remaining steady at 4.2%, Appcast's chief economist Andrew Flowers suggests the job market is weaker than headline numbers indicate, with the lowest average monthly job creation in years outside of the pandemic era. Flowers points to a concentration of job growth in sectors like healthcare and leisure, which are vulnerable to policy changes such as potential Medicaid cuts and tariff impacts, and notes a decline in job-finding rates, particularly for entry-level and knowledge-worker positions, highlighting a potential mismatch between available jobs and job seekers' skills.

Analysis

The U.S. job market, while presenting headline stability with 139,000 jobs added in May and an unchanged unemployment rate of 4.2%, exhibits underlying vulnerabilities according to Appcast's chief economist, Andrew Flowers. The average monthly job creation of 144,000 over the past year marks the lowest rate since 2011, excluding the pandemic-induced downturn, indicating a market that is merely "treading water." Job growth is significantly concentrated in healthcare, leisure and hospitality, and social assistance. Healthcare, which has accounted for approximately 30% of new jobs in the last three years, faces substantial risk from proposed policy changes, including potential $700 billion Medicaid cuts and alterations to ACA marketplaces under the "Big, Beautiful Bill," which Flowers warns could "kill the golden goose." Similarly, leisure and hospitality sectors are susceptible to the impact of tariffs, which may lead to reduced consumer spending as businesses pass on increased costs. Evidence of this is already emerging with declines in warehousing and retail jobs. The job-finding rate is reportedly slipping, particularly for entry-level workers and those in knowledge-based fields such as finance, marketing, and technology, where growth is weak and the professional and business services sector is shedding jobs. This creates a potential mismatch, as young, college-educated individuals face difficulties securing desired positions while blue-collar roles may become hard to fill. Compounding these concerns, a recent Federal Reserve report indicates the U.S. economy has contracted over the last six weeks, characterized by declining business growth, higher prices, slower hiring, and elevated economic and policy uncertainty leading to cautious business and household decisions.

Key Decisions for Investors

• Investors should exercise increased scrutiny towards sectors heavily reliant on current job growth drivers, particularly healthcare, given its significant exposure to potential federal funding cuts (e.g., $700 billion in Medicaid) and policy shifts, and leisure/hospitality, which could be negatively impacted by tariffs and subsequent declines in consumer discretionary spending.
• Monitor leading labor market indicators beyond headline unemployment figures, such as job-finding rates for new entrants, sector-specific employment trends, and wage growth in non-supervisory roles, to gauge the true health and breadth of the labor market, as the current average job creation is at a multi-year low excluding the pandemic.
• Assess potential impacts on companies dependent on entry-level knowledge workers or those catering to recent graduates, as the reported weakness in job growth for finance, marketing, sales, and software development roles, coupled with a Federal Reserve report of economic contraction and policy uncertainty, may signal headwinds for these segments.
• Factor in the heightened policy uncertainty and its potential to dampen overall business investment and hiring, as noted in the Federal Reserve report, when evaluating forward-looking earnings and growth prospects across portfolios.