Is the US labor market healthy?

Happy Tuesday out there, Team 42. It's your skipper here, Darius Dell, to present our Macro Minute for Tuesday, September 29th, 2026. As always, we'll start with the executive summary from today's lead-up warning note, so let's dive right in. Today's key macro question is, is the U.S. labor market healthy? The short answer is no, and it is unlikely to meaningfully improve if we continue to be right on our jobless recovery and productivity boom themes. The key supporting evidence is the August JOLTS report did not support the consensus forecast of accelerating growth. The August private sector job openings data supported our jobless recovery and productivity boom themes. The U.S. labor market remained structurally broken. Total employment peaked in December of 2025, according to the Household Survey. Core private services payrolls peaked in March of 2024. The private sector job openings rate has been persistently above the private sector highest rate since the mid-2010s. The current 90 basis point spread in those two rates is over a full percentage point above the long-run mean of minus 20%. Additionally, the long-term unemployed/total unemployed workers ratio of 27% is more than 1,000 basis points above its long-run mean of 16.5%. Lastly, core private services payrolls, i.e., the 54% of the U.S. labor market that is most exposed to AI disruption, peaked 2.5 years ago in March of 2024. The cyclically and structurally depressed levels of the private sector hires rate, private sector quits weight, and private sector layoffs and discharges rate in the August JOLTS report are the same as in the mid-2010s. The growth of the labor market is a key driver of the plunge in private sector average hourly earnings growth, which is sharply underperforming survey-based measures of labor market select. So what does this all mean for your portfolio? The good news is that the global energy supply shock is unlikely to feature second-round growth. Because of the persistence of our productivity boom, jobless recovery, and cooling housing and labor themes, lag, disinflation, and Zillow nationwide rent prices, which bottomed in March of 2026, supports our cooling housing and labor theme. As predicted, the uptrend in shelter CBI reversed, and the housing PCE deflator should follow suit in the coming months. Both measures are likely to trend lower throughout the first half of 2027. This is part of the reason why we are currently convinced the Fed is not on the precipice of a sustained business cycle truncating, tightening cycle. Unnet, our analysis of the interconnected amorphous drivers of inflation currently signals that the Fed should tighten monetary policy imminently and then remain on hold over the medium term. Regarding labor specifically, the 42-macro multi-factor Fed decision tree model indicates the current level of the U3 neighborhood spread signals the Fed should tighten monetary policy imminently and pause thereafter. The current level of the output gap signals the Fed should not adjust monetary policy imminently or over the medium term. And the current level of the modified Phillips curve currently signals the Fed should ease. The key reason why we are convinced the Fed is not on the precipice of a sustained business cycle truncating, tightening cycle is the geopolitically driven supply-demand imbalance in the Treasury bond market and the continued policy intervention it is perpetuating. Refer to our September 26 Around the Horn and September 28 lead-off warning notes for more details. As always, to wrap up with a question from our community, this one's titled, what do you rate the odds of this cycle ending in? And it provides for. Scenario one being a deflationary bust. Scenario two, stagflation. Scenario three, muddling along with no recession. And scenario four, continued growth for running hot. So our views are these are reasonably appropriate scenarios. I think there's an alternate scenario which is unknown, assuming unknown, will leave unknown out of this equation because there is a high degree of uncertainty when you're talking about introducing a new general purpose technology into the society. into our civilization, you know, you're going to have all sorts of geopolitical consequences, all sorts of domestic political consequences. You're, you know, you're basically, you're going to disrupt legacy industries. You're going to have frenzied overbuilding. You know, you can have all these things that are massive change with a capital C, capital H, capital A, capital N, capital G, capital E. You're going to have a massive change everywhere. And so to assume that, you know, we can use yesterday's business cycles or yesterday's financial market cycles as, you know, you know, clairvoyant roadmaps to how this all ends is I think is a big assumption. And then a big assumption that if you're resting on that assumption and not doing the daily, the daily Bayesian inference process work that you need to do to challenge that assumption, then I surmise your portfolio is going to be at a much lower net asset value at some point in the future than you're currently prepared for. So by review, I would definitely challenge all of your assumptions given the, you know, that the range of the distribution of probably economic policy market outcomes. As wide as anybody's ever seen. So if you think you haven't figured out in terms of where this is all headed, you're just not doing enough work, quite frankly. So answering the question, what we currently peg these odds based on everything we know today, which will be less than everything we know tomorrow and everything we know on Thursday will be more than everything we know Wednesday. We're always learning. And that's the whole point of having a Bayesian inference process. We talked about that with our friends, Tom Keene and Paul Sweeney on Bloomberg on Friday. Check that out when you get a chance. Our current odds of these four scenarios, are 65% deflationary bust, 5% stagflation, 5% muddling along with no recession, and they continue growth from running hot. I assume they mean, you know, at or above trend growth. And the reason we say ours are 5% muddling with no recession, and then 25% continued growth from running hot. So in our view, we think this is going to head for deflationary bust. Again, when you have new general purpose technologies, they catalyze frenzied overbuilding, lots of leverage, increasingly complex financing structures, and they disrupt legacy, and so forth. And we're going to have to wait and see what happens. We're going to have to wait and see what happens. Again, it's because of the capital change. All caps change. There's so much change that everyone's legacy positionings need to change as well. When you have a lot of change in legacy positionings with financial market leverage on top of that, you wind up with secular bear markets. That's as simple as it gets. And so, you know, our view is that that's the highest probability outcome at about a two-thirds recession. And the residual, assuming we can't put any allocation to the uncertainty bucket, the residual will be about 25%. We'll continue growth from run it hot. So right now, we're in paradigm C, run it hot. We think paradigm C will be followed by paradigm D, which is default via debasement. And we think paradigm D will be followed by paradigm E, which is major political realignment and total war. Running the economy hot, defaulting via debasement, and major political realignment via total war are all three of the most inflationary things that society can do. So you can have a significant amount of elevated nominal GDP. So you can have a significant amount of elevated nominal GDP growth. It might not be good. It might not feel good from the perspective of investors. But you could have a lot of elevated nominal GDP growth for an extended period of time. So we're not ruling that out, nor are we ruling out the unknown. There's a lot of unknowns unknown here. And so I think it just pays for us to be humble and acknowledge that there are a lot of unknown unknowns and just continue to just keep our heads down and do the work that's required, the Bayesian inference process work that's required to collapse uncertainty into risk. We can manage risk. We can't manage uncertainty. And that's our job. So we'll wrap it up there. Derry's still here presenting our macro minute for Tuesday, September 29th, 2026. Best of luck out there today. We'll catch you back here tomorrow. Cheers. If you enjoyed this content, please remember to like and subscribe. Thank you. This content is for informational purposes only and does not constitute an offer or a solicitation. 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