U.S. Landing Gear Engaged, Labor Data in Focus

Key takeaways

StoneX’s Kathryn Rooney Vera said the economy has slowed, but avoids recession
Weakening labor trends and investment-driven growth are shifting economic landscape
Labor market dynamics will likely determine the pace and magnitude of Fed action

After a recent release of U.S. labor market data, Kathryn Rooney Vera, Chief Market Strategist at StoneX, said that while it showed the US economy has slowed, it has thus far avoided slipping into a recession. This, she suggests, is driven by lower interest rates and what she calls “hopes of a soft landing.” Investors, she suggested, may be more concerned trying to decide if “cooling trends” are just that, or signs of a something more substantial.

Rooney Vera noted that while “distress” is not currently widespread, factors like future immigration policy, strong corporate profit margins, and continuance of positive productivity rates warrant attention, as they will have a direct impact on inflation, interest rates and the labor market.

She pointed to recent remarks by Fed Chair Jerome Powell concerning the Fed’s aversion to a rising jobless rate and the importance of other key numbers, “[l]abor market dynamics will dictate the pace and magnitude of Fed policy adjustments.” If job stability takes a hit, she suggests, consumer spending habits will shift, having broader economic implications.

Other recent data that Rooney Vera suggests shows slowing labor market conditions include:

Unemployment Trends: The unemployment rate climbed to 4.3% in July, up from a low of 3.4% in April 2023, surpassing the Fed’s year-end projection of 4%.

Labor Supply Pressures: Rising immigration and increased labor force participation have elevated unemployment levels, so while not all (the near 1ppt) increase in unemployment is “bad” Rooney Vera said, the higher supply of unemployed individuals threatens to keep the U3 rate elevated and weaken wage growth.

Productivity and Wage Growth: Kathryn said productivity growth remains above trend and better than expected. Wage growth has room to grow without jeopardizing the Fed’s 2% inflation target.

Investment-Led Growth Amid Labor Market Weakness. Despite the labor market's challenges and the negative impact this could have on consumption, Rooney Vera said private sector investments in tech, AI, and infrastructure might mitigate recession risks. “This shift to investment-driven growth and rise in technology adoption make it more complicated to read labor market weakness and pose a risk of further disruption in the labor market, potentially leading to something similar to the jobless recovery the US economy experienced in the 2000s.”

Investment Strategy

Fixed Income Shorten Duration: With the Fed cutting interest rates next month and likely after that, Rooney Vera said that long-duration bonds should increase in value. Conversely, she added, if unemployment rises quickly and leads to bigger rate cuts, increased pricing volatility could favor shorter durations.

Defensives: Rooney Vera said Healthcare, Consumer Staples, and Utilities offer stability and are more resilient during economic cycles. Favored subsectors remain renewable energy utilities, water utilities, and electric power companies focused on green energy (the Harris trade).

Read Rooney Vera’s full analysis on labor market conditions here and her broader macro insights and charts in the Macro Strategy subscription.

Dive Deeper: Access Kathryn Rooney Vera’s Analysis

For more in-depth analysis on global market trends and investment strategies, subscribe to "Macro Strategy by Kathryn Rooney Vera.” This comprehensive suite of reports offers expert insights on socio-economic and political trends influencing global markets, authored by StoneX's Chief Market Strategist.

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