Macro Theme : US Labour Market

Employment composition, tightness, wages, hours, flows and sentiment.

Executive Summary

The US labor market exhibits a largely neutral, yet softening, overall regime, with an explicit slack gap currently assessed as NEUTRAL and STABLE with MEDIUM confidence (1). While many aggregate indicators remain within neutral bounds, several underlying signals point to an incremental cooling, particularly concerning employment quality and worker confidence.

Employment composition, underemployment risk, and labor market tightness signals generally reflect a neutral state. However, the labor market turnover differential and consumer sentiment show more distinct signs of weakening. Labour market momentum is neutral overall, but with conflicting trends between claims and payrolls.

• Employment composition regime: NEUTRAL (approaching COOL) (2)
• Underemployment trend and level: NEUTRAL but U-6 rate rising (3)
• Tightness / turnover conditions: JOLTS Tightness NEUTRAL (4), Turnover Differential Bearish (5)
• Hours and momentum signals: Weekly Hours NEUTRAL (6), Labour Momentum Neutral (7)
• Overall labour-market bias: Still Neutral, but with clear indications of cooling at the margin, particularly in worker confidence and specific tightness measures.

1. Employment Composition & Headline Slack

The Employment Composition Signal currently indicates a NEUTRAL regime as of 2025-11-01, with a smoothed composite z-score of -0.67 (2). This reading is near the "COOL" threshold of -0.75, suggesting rising labor market slack (2). The participation rate stands at 62.5% with a 3-month momentum of +0.2.

The employment-population ratio is 59.6% with zero 3-month momentum, while the unemployment rate has increased to 4.6% with a consistent 3-month momentum of +0.3 (2). Downward pressure on the composite primarily stems from a low employment-population ratio z-score of -0.96 and a significant negative contribution from the unemployment rate z-score of -1.01 (2).

2. Underemployment & Hidden Slack

The Underemployment Risk signal is in a NEUTRAL regime as of 2025-11-01. The U-6 underutilization rate is 8.7%, indicating a +0.6 percentage point increase over the last three months and a notably elevated z-score of 1.40 (3). This suggests increasing hidden slack in the labor market.

Conversely, the median weeks unemployed decreased by -0.3 weeks over the same period to 9.5 weeks, with a neutral z-score of 0.00 (3). Despite the improvement in unemployment duration, the rising U-6 rate points to underlying slack, which, if sustained, could moderate consumption support and wage pressures (3).

3. Tightness, Turnover & Job Flows

Labor market tightness, as measured by the JOLTS composite, remains in a NEUTRAL regime as of 2025-10-01, with a composite z-score of -0.44 (4). However, the core tightness differential (quits rate minus layoffs rate) is 0.6 percentage points, with its z-score at -0.74, nearing the "COOL" threshold. The job openings rate is 4.6% with a neutral z-score of 0.00 (4).

The Labor Market Turnover Differential, which focuses specifically on worker confidence, indicates a Bearish regime as of 2025-10-01 (5). The differential of 0.6 percentage points (quits rate of 1.8% minus layoff rate of 1.2%) combined with a robust z-score of -1.18 reflects weakening worker confidence. Quits declined from 2.0% to 1.8% while layoffs increased from 1.1% to 1.2% between September and October 2025 (5). This suggests a divergence, with the core JOLTS composite remaining neutral due to sustained openings, while worker-driven turnover signals increasing caution.

Job flows indicate a NEUTRAL regime as of 2025-03-31, with a composite z-score of -0.21 (8). Net Job Creation remains positive at 210.0 but the 4-quarter moving average of Labor Dynamism is at a dataset low of 124.25 (8). This reflects waning churn and potential downside risk to growth, consistent with a cooling labor market at the margin, despite the neutral aggregate regime (8).

4. Hours Worked & Labour Momentum

The Weekly Hours signal indicates a NEUTRAL labor demand environment as of 2025-11-01, with the composite level z-score at 0.0, placing it at its historical median (6). Total private hours stand at 34.3 and manufacturing hours at 40.0 (6). While the 3-month change composite is positive at +0.05, its 3-month moving average is slightly negative at -0.067, suggesting a recent moderation in the pace of demand increases (6).

Labour Market Momentum remains in a Neutral regime for November 2025, with an overall momentum of 0.138 (7). This state is driven by tightening jobless claims (ICSA z-score of 0.712 and CCSA z-score of 0.358) (9)(10), but offset by softening nonfarm payrolls momentum (PAYEMS 3-month difference z-score of -0.656) (11). This internal tension suggests that while layoffs are contained, the pace of new hiring has decelerated, contributing to a plateauing in overall momentum (7).

5. Sectoral Breadth & Diffusion

The Sectoral Employment Diffusion Index indicates a NEUTRAL regime as of 2025-11-01, with an index value of 50.0 (12). This signifies that half of the four tracked sectors reported positive year-over-year employment growth. Specifically, Construction (+0.70%) and Leisure & Hospitality (+0.96%) saw gains, while Manufacturing (-0.57%) and Professional & Business Services (-0.19%) experienced contractions (12).

The diffusion z-score is 0.0, placing it at the historical median, and 3-month momentum is flat (12). This implies a balanced yet somewhat divergent sectoral performance, with slack or strength not broadly distributed across the economy (12).

6. Synthesised US Labour Market Regime

Integrating the various labor market signals, the synthesized US labor market regime can be characterized as Neutral with Underlying Cooling Tendencies. While aggregate measures such as the Explicit Slack Gap (1), Labor Market Tightness (4), Weekly Hours (6), and Labour Market Momentum (7) remain within neutral bounds, there are clear indications of softening at the margin. Specifically, the Employment Composition signal is nearing a COOL regime (2), Underemployment (U-6) is rising (3), Labor Market Turnover is Bearish (5), and Job Flows are showing waning dynamism (8). This creates a mixed picture, where overall stability coexists with incremental weakening, suggesting a shift from robust tightness towards increasing slack, a trend also echoed by the Bearish Consumer Sentiment (13).

Pillar	Current Regime	Interpretation
Employment Composition	NEUTRAL (2)	Approaching cooling, indicating rising slack.
Underemployment	NEUTRAL (3)	U-6 rising despite stable median weeks, suggesting hidden slack.
Tightness (JOLTS)	NEUTRAL (4)	Aggregate JOLTS composite is stable, but underlying quits-layoffs differential is easing.
Turnover & Job Flows	Turnover: Bearish (5); Job Flows: NEUTRAL (8)	Worker confidence weakening, job dynamism waning.
Hours & Momentum	Hours: NEUTRAL (6); Momentum: Neutral (7)	Hours stable; momentum neutral with payroll softening offset by contained claims.
Sectoral Diffusion	NEUTRAL (12)	Mixed sectoral performance, neither broad expansion nor contraction.

7. Explicit Slack Gap Assessment

Based on the Explicit Slack Gap signal (1), the canonical view indicates a Slack Gap Direction of NEUTRAL, with Slack Gap Momentum assessed as STABLE. This assessment carries MEDIUM confidence. The current gap of -0.12 percentage points (UNRATE 4.2% vs. NROU 4.32%) (1) suggests the labor market is near its non-inflationary equilibrium, but with a modest positive momentum in the gap, hinting at a potential future widening of slack.

8. Forward Risks

Upside / Resilience Risks

• Stabilisation or improvement in underemployment metrics, particularly a reversal in the rising U-6 rate (3).
• Improving turnover and job flows, manifested through a recovery in the Labor Market Turnover Differential (5) and stronger net job creation (8).
• Sectoral re-acceleration and broadening of gains, moving the Sectoral Employment Diffusion into a "HOT" regime (12).

Downside / Slowdown Risks

• Underemployment turning “HOT” or a significant rise in median duration of unemployment, indicating deepening slack (3).
• Further deterioration in job flows and hiring, leading to a "COOL" regime for Job Flows (8).
• Sectoral diffusion tipping into COOL with broad-based weakening, where fewer than half of tracked sectors show positive YoY growth (12).

9. Investment Interpretation (Informational)

The current labor market dynamics, characterized by overall neutrality but with increasing marginal cooling signals, suggest moderating wage pressure (14). While the Wage Pressure z-score is still negative, the decline in the Labor Tightness component indicates easing labor market frictions (14). This environment could support a continued disinflationary trend, but the rate of moderation remains a key variable.

Household consumption and corporate earnings remain sensitive to these labor market signals. Weakening employment composition (2), bearish consumer sentiment (13), and declining labor market turnover (5) could foreshadow reduced consumer spending capacity and cautious corporate investment. From a policy perspective, a neutral but cooling labor market implies that the central bank may find less impetus for aggressive tightening, while remaining vigilant for signs of either persistent inflationary pressures or an accelerating slowdown.

Missing Content / Critical Improvements

• The latest PAYEMS data for 2025-12-31 is missing, preventing a complete and current calculation of the Labour Market Momentum signal's payroll component (11). Resolution requires updated PAYEMS data.
• `Hours_Level_Composite_0_100` consistently reports 50.0 across all observations, despite variation in the underlying `Hours_Level_Composite_z` (6). This suggests the min-max scaling to 0-100 may not be fully functional or informative for the provided data range.
• `Job_Flows_Composite_0_100` remains flat at 40.72055 across all quarters in the provided data (8). This is unexpected for a min-max scaled composite and suggests a potential calculation or data reporting issue that could misrepresent historical signal context.