The U.S. economy at the moment could perhaps be described as being stuck in the twilight zone, with leading economic indicators pointing to a marked slowdown, while the coincident and lagging indicators still indicate economic expansion.

For example, interest rates have increased significantly but have not yet fully impacted the economy, and consumer confidence has plunged, but there have been few layoffs and wages and employment growth are still strong. Housing activity has dropped by 40% year to date, yet house prices are experiencing their own Rod Serling moment, growing by 19% per annum. Lastly, industrial activity is still expanding, despite company surveys showing that managers think it is not a good time to expand, and small business sentiment is at its lowest level since 2013 (i.e., lower than during the pandemic). Ultimately, the most important factor with regard to the shape of any potential downturn will be the behavior of the labor market.

With last Friday’s employment report now behind us, in this Economics Weekly, we look at what the current labor market data is telling us and what it might mean for the path of growth, profits, and the Fed ahead.

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Richard de Chazal, CFA, is a London-based macroeconomist covering the U.S. economy and financial markets.