The job market is telling us something about consumers

Consumers are the heartbeat of the U.S. economy, accounting for two-thirds of its growth. 

But let’s not forget that most of those consumers don’t just spend. They also work. And lately, the symbiosis between the job market and retail spending is getting more entwined.

Despite hard data showing a weakening labor market and soft data showing downbeat consumer sentiment, spending has been mostly solid this year. The latest data shows that consumer spending increased 0.5 percent in July from June, the steepest monthly increase since March.

Given the symbiosis between consumers and work, one question for the economic outlook is, “Can consumers keep up their current pace of spending?” According to jobs data, the answer is ¼ maybe.

Here are two important things the job market is telling us about the state of consumers.

Workers are staying put

As consumer spending accelerated in July, ADP payroll data showed that employee turnover reached its lowest July level since we began tracking the data in 2017. The share of workers leaving their employers, voluntarily or involuntarily, was below 6 percent this past July and in July 2024, a slowdown from earlier years.

Though hiring has slowed, this trend of workers—consumers—sticking with employers has provided a stable source of income to fuel continued spending.

Pay growth and inflation: a dead heat

Workforce stability has been a defining characteristic of the labor market over the past two years. ADP Pay Insights data shows that pay growth for job stayers was up 4.4 percent in August from a year earlier.

However, when we widen our view to look at new hires, a different picture emerges. For these job-changers, pay grew 2.4 percent in August year-over-year. 

Something else interesting happened in August: The pace of consumer inflation reached 2.9 percent. In 2021 and 2022, the pace of consumer price growth soared above base pay growth. More recently, these two growth rates have been in a near dead heat.

Base pay is growing faster now than it was before the pandemic. Still, it’s struggling to outpace the inflation of the past two years. That eventually could lead consumers to pull back spending.

My take

Since the pandemic, the symbiotic relationship between the job market and consumer spending has become more tightly intertwined in the face of higher inflation.

This relationship now is being pressure-tested by the hiring slowdown and sticky inflation described above, trends that hint at a coming tipping point. If consumer spending falters, will hiring slow further? Alternatively, will the hiring slowdown put the brakes on consumer spending? 

After four years of too-high inflation, the job market might be telling us that consumers are showing some wear and tear. The delicate balance of the past few years might be tipping.

The week ahead

Tuesday: Consumer sentiment is slipping; will consumer spending follow? The Census Bureau releases August data on retail sales this morning.

Wednesday: A highly anticipated Federal Reserve rate decision anchors the week. And the interest-rate sensitive housing market will provide fresh data on residential starts in August.  Starts were up 5.2 percent in July, Census data showed, but slowing single-family construction has added to affordability pressures.

Thursday: After a years-long stretch of historically low initial jobless claims, this proxy for layoffs popped up to 263,000 last week, highest level since October 2021, according to the Department of Labor.  I’ll be looking to see whether this volatile number edges back down or drifts higher.