Lots More on the Worsening State of the US Labor Market

Episode Summary

Executive Summary: The episode focuses on the weakening U.S. labor market amid missing official jobs data during a government shutdown, with debate over conflicting alternative indicators, the Fed’s likely response, and how AI, immigration, and cost-cutting are reshaping hiring. The guests argue the labor market is softer than headline unemployment suggests and could deteriorate further into 2026, while also exploring political and corporate implications of AI adoption.

Main Topics: Labor market weakness and the missing jobs report (Priority: 5/5): The hosts discuss the frustration of lacking official payroll data during the shutdown and debate whether alternative indicators like ADP, Challenger, and claims are signaling a real slowdown or just noise. Conflicting labor data and what it means (Priority: 5/5): They contrast ADP payroll gains with large announced layoffs in Challenger data and relatively steady initial claims, explaining why these measures can point in different directions. Spot market vs. contracted economy (Priority: 4/5): Connor frames the economy as a tension between the current 'spot' market and legacy 'contracted' wages/prices from 2022, arguing that salaries, rents, and business expectations are adjusting unevenly. AI as a labor-market and political factor (Priority: 5/5): The conversation questions whether AI is directly displacing workers, while emphasizing that companies may still cut labor to fund AI investment or to appear aligned with the trend. Fed policy, rates, and transmission limits (Priority: 4/5): The discussion considers whether rate cuts can meaningfully improve housing or labor conditions, with skepticism that the Fed can solve problems if structural forces like AI or immigration are at work. Consumer weakness and value-tier pressure (Priority: 3/5): Examples from McDonald's, Chipotle, Sweetgreen, and Cava illustrate that price-sensitive consumers and weaker demand are showing up across food and service categories. Political and credit-market implications (Priority: 4/5): The guest predicts AI will become a major political issue by 2028 and warns that private credit and alternative lenders could face stress if the economy deteriorates.

Key Arguments: The labor market looks weaker than the headline unemployment rate suggests, especially when looking at hiring trends and long-term unemployment. ADP and Challenger are imperfect but useful signals; their divergence reflects different methodologies, not necessarily contradiction. The economy may be in a 'spot vs. contracted' transition: new hiring prices are lower than the wages and expectations locked in during 2022. Reduced immigration may lower the break-even pace of job growth, but weaker population growth also reduces demand in housing and consumer sectors. AI is probably not yet directly eliminating many jobs, but companies may cut labor to fund AI investment and signal modernity to investors. The Fed can cut rates, but monetary policy may have limited power if labor weakness is driven by structural forces rather than cyclical ones. Consumer demand is getting more price-sensitive, with value meals and lower-priced offerings becoming important across restaurant chains. Private credit underwriting and nonbank lenders may be vulnerable if the economy softens further.

Data Points: ADP payroll change: 42,000 - ADP reported private payrolls up in October. Challenger announced layoffs: 150,000+ - Challenger data was described as the worst month for layoffs in 20 years, with more than 150,000 cuts announced. Fed rate cuts: 150 basis points - Used to argue that housing has not improved despite substantial easing. Unemployment risk: high fours - Connor says the unemployment rate could rise into the high 4% range. Time horizon for worsening labor market: 3 to 6 months - Connor expects conditions to be worse than today over the next few months. Hurricane Helene timing: late September last year - Initial claims comparisons are distorted by a prior-year spike tied to Hurricane Helene. McDonald's value meal: $5 - Cited as part of McDonald’s effort to restore its value proposition. Sweetgreen stock decline: $45 to $6 - Used as an example of sharp valuation compression in consumer/food equities. Cava stock decline: $150 to $47 - Another example of a sharp stock reset among premium fast-casual names.

Pivotal Quotes: "AI shouldn't eliminate them, it should elevate them." — Intro narration / Palantir ad: Positioning AI as a complement to workers rather than a replacement. "I think we have evidence over the past few months that at least there's no reason for low fires to still be happening in corporate America." — Connor Sen: Arguing that firms may no longer need to hoard labor and could begin cutting more aggressively. "I worry a bit that it's like we all freaked out in April, May, and then it was kind of fine for six months, and then now is when people are going to make their investment and spending plans for next year, and those are going to come in lower than they did a year ago." — Connor Sen: Describing why labor and spending weakness could intensify into 2026.

Implications: Listeners should expect a messier labor-data environment, softer hiring, and more debate over AI’s role in employment. For markets and policy, the bigger risks are slower growth, weaker consumer demand, and limited Fed ability to reverse structural labor changes.