How a Weaker Labor Market May Impact U.S. Consumers

Morning Consult’s U.S. Unemployment Index stood at 98.75 at the end of July, a slight decline from recent highs. However, the recent improvement has not erased the upward trend observed through the first half of 2024: prior to this year, the index hadn’t reached as high as its late-July level since October 2021.

The Unemployment Index bears a moderately strong correlation with the Bureau of Labor Statistics’ unemployment rate, but the two measures do not move in lockstep. While the two share a common definition of employment, survey and sampling differences at time contribute to slight differences in trajectories. Recently, Morning Consult’s Unemployment Index has been broadcasting more rapid deterioration in labor conditions than the official unemployment rate suggests. The recent divergence may be a sign that consumers are feeling more strains in labor conditions than are visible in topline government metrics.

Labor supply and demand appears balanced with a hint of softening

What has for a long time been characterized as a “tight” labor market may no longer be the case. Since the Morning Consult’s unemployment index first crossed above the 100 threshold in early February of this year, the metric has averaged 100.6. These readings suggest labor supply and demand conditions are already balanced with a slight lean toward further softening.

During the July reference week for the Bureau of Labor Statistics (the week including the 12th of the month, during which the agency collects unemployment data for that month), Morning Consult’s index showed a reading of 100.6–just above the neutral level of 100. The reading does not suggest a substantial rise in unemployment from June to July. However, the generally weaker picture painted by this index in recent weeks could filter through to tomorrow’s jobs data, either through diminished strength in the jobs and unemployment numbers or further downward revisions to past months’ data. 

Employed workers showing signs of slack, adding risk of future job losses

Layoffs and reports of lost pay or income have not displayed any notable increase recently. However, other metrics have shown signs that more labor weakness could be yet to come. According to Morning Consult’s data, slack in the workplace has been on the rise: The net share of employed adults who say their employer has more than enough workers to complete the needed work has averaged higher so far in 2024 than in the previous two years. The presence of excess workers on payrolls could be a leading indicator of potential future cost cutting by firms.

Another signal reinforcing the impression of diminished output demand on workers can be found in the BLS’s data tracking hours worked. The total number of weekly hours per worker have trended steadily lower over the past couple years. In fact, excluding the very start of the 2020 pandemic, the average number of reported working hours over the first six months of 2024 equaled the lowest level of any six-month period since 2011, when the U.S. economy was still slogging through recovery from the Great Recession.

The growing evidence of slack in the workplace begs the question: If employers seemingly have less and less demand for workers, why are they holding on to them? One reason may be the relatively recent memory of labor shortages; the opportunity cost of insufficient staffing to service demand plus the real cost of hiring in a competitive labor market may have left a lasting bias against headcount reductions. 

Another explanation is businesses’ expectations for imminent rate cuts by the Federal Reserve–a development that employers may expect will boost demand for goods and services and reignite their need for workers. However, there remains lingering uncertainty as to when and how much the Fed will indeed cut rates, and to what degree the eventual moves will boost demand in various sectors. The Fed elected to hold rates steady in July, and will not meet again until September; meanwhile, consumer-facing businesses are already facing a contraction in demand. For as long as this uncertainty persists, the elevated signs of decreased workloads for employees suggests more workers may be vulnerable to potential layoffs. 

Further weakening in employment is critical risk to consumer sector

The cooling labor market is already impacting consumer demand, and further deterioration could lead to more substantial repercussions. According to Morning Consult’s data tracking consumers’ income sources, Americans have been relying more and more on wages to support spending. Money earned from working has made up a rising share of total income since late 2022 when tracking began.

Notably, the increase is not necessarily being driven by wage growth, which has been slowing. Instead, the income growth may be partly a result of more already-employed workers taking on second jobs. This trend could be viewed as a positive outcome afforded by greater flexibility in terms of the types of jobs available and ways of working post-pandemic. But perhaps even more likely is the possibility that supplementary employment is being sought out of necessity to keep up with the substantial increase in the cost of living over the past few years.

These second jobs may also be contributing to the seemingly contradictory story as the BLS reports both steady job growth and rising unemployment: Some of the jobs added aren’t being filled by the unemployed, they are instead going to already-employed adults taking on secondary work. 

Labor market keeps tiptoeing toward shakier ground

In general, Morning Consult’s data through July has continued to show a weakening picture of the labor market. While the past month did not show rapid deterioration in employment outcomes for U.S. workers, there is risk of further job losses if employers become less sanguine about holding onto excess workers.