'Yikes': Top investment bank looks under the hood of the economy and finds 'the labor market doesn't look that good'

UBS economists have issued a stark warning regarding the U.S. labor market, indicating a significant and accelerating deterioration that challenges the prevailing "low hire, low fire" narrative. They cite surging layoff announcements, with October seeing 157,000 cuts (the highest since July 2020) and a year-to-date total of 760,000 (the highest since 2009), alongside hiring rates slowing to recessionary levels and a 0.6 percentage point jump in the U-6 underemployment rate to 8.1%. This "bathtub" effect, characterized by increased job losses and reduced hiring, poses a material risk to household confidence, consumer spending, and the broader economic recovery, potentially intensifying Federal Reserve deliberations as some officials express growing concern over rapid labor market weakening.

Analysis

UBS economists report a significant and accelerating deterioration in the U.S. labor market, challenging the prevailing "low hire, low fire" narrative. October saw 157,000 layoff announcements, the highest since July 2020, contributing to a year-to-date total of 760,000 cuts, marking the highest since 2009. This surge in job destruction is corroborated by unemployment claims and WARN notices exceeding pre-pandemic levels.

Hiring rates have concurrently slowed to recessionary levels, with private-sector payrolls (excluding healthcare) declining by 36,000 jobs monthly. The U-6 underemployment rate has risen 0.6 percentage points to 8.1% since January, indicating increased labor market slack and more individuals working part-time for economic reasons. Major companies like Amazon, UPS, and Target have executed substantial job reductions, particularly in technology and warehousing.

This "bathtub" effect, where outflows (layoffs) increase and inflows (hiring) decrease, poses a material risk to household confidence and consumer spending. Seasonal holiday hiring is also significantly below pre-pandemic norms, further signaling a broader market contraction. Consumer confidence has dropped to 50.3 in November, barely above its all-time low, reflecting widespread concern.

The Federal Reserve faces growing internal division, with some policymakers now prioritizing labor market risks over inflation concerns. The potential for rapid labor market deterioration underscores the need for caution and flexibility in monetary policy, as continued contraction could undermine the entire economic recovery.

Key Decisions for Investors

• Investors should closely monitor upcoming labor market data, particularly unemployment insurance claims and the U-6 underemployment rate, for further signs of accelerating weakness.
• Re-evaluate exposure to sectors heavily impacted by layoffs, such as technology and warehousing, and consider defensive positioning given the projected decline in consumer spending and confidence.
• Anticipate increased volatility in Federal Reserve policy discussions, as the central bank navigates conflicting concerns between inflation and a rapidly deteriorating labor market, potentially leading to earlier-than-expected rate cuts if the trend persists.