Labor market hotter today than during 2008 financial crisis, but Fed tightening will weaken it, Bank of America says

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  • Current labor market conditions are consistent with historically tight labor markets, Bank of America said in a note.
  • But the labor market deteriorated slightly, signaling a downturn ahead for the economy, BofA said.

The current labor market matches the hot conditions of the late 1990s and the run-up to the 2008 financial crisis, but momentum has deteriorated and central bank moves are likely to stall further, according to Bank of America.

Friday’s nonfarm payrolls data was strong, beating consensus expectations to show employers added 528,000 new jobs in July, about double most forecasts. The hot reading, however, aligns with BofA’s expectations for a continued hawkish Fed.

In a Thursday note ahead of the new jobs data, analysts presented the BofA indicator of U.S. labor market conditions. It takes into account a multitude of variables, including private sector payroll, employment in temporary help services and cyclical participation in the labor market, among others.

BofA concluded that, all together, these variables indicate that current labor market conditions are warmer than the previous two peak expansions.

Prior to 2000, this gauge ran for nine months before the recession that began in April 2001, BofA said, and it also peaked nine months before the recession was officially announced by the National Bureau of Economic Research in January 2008.

And now, current data reveals conditions that remain consistent with a historically tight labor market, and the momentum is waning.

“[T]They also show that labor market dynamics have slowed sharply over the past year as the economy recovered from the pandemic,” BofA analysts wrote. ‘weaken when momentum is below average for an extended period of time.’

The indicator confirms that a tightening of monetary policy weakens activity in the labor market. And with the Fed continuing its aggressive policy, BofA predicts that a soft landing will be difficult for the Fed to achieve and that a cooling in labor markets will have to occur in order to restore price stability.

Fed tightening in 2000 and 2006 dragged down the level of labor market activity as the United States entered a recession.

With the Fed showing no sign of easing its hawkish policy, the US economy could follow a similar trajectory. Bank of America previously forecast that the United States would enter a mild recession in the second half of 2022.

“If labor market dynamics were to remain negative in the coming months, we would interpret this development as a negative signal for the longevity of the current expansion,” BofA said.

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