The pandemic forced many US companies to slim their workforce, but the economic rebound that followed created a huge boom in jobs and a huge shortage of workers. And that all helped to push wage growth and inflation higher. But the trend has now reversed, and there are more companies warning about job cuts (orange line) than complaining about labor shortages (white line). This suggests that the labor market may be eroding beneath the surface.

While a drop in labor shortages is a good sign for inflation – a better alignment between available workers and available jobs should lead to slower wage growth and cooler inflation – the rise in job cuts is a worrying sign for economic growth. When people lose their jobs, they cut their spending, which in turn impacts companies' profits and forces them to let more workers go, reinforcing the negative cycle.

What’s more, rising job cuts suggest that the fallout from a long run of rate hikes is finally being felt across the economy and that further weaknesses could be in store. As I explained here, the job market is usually the final domino to be felled by steepening interest rates.

Sure, there are signs of strength yet in the economy: consumers are generally in good shape and job cuts have been mostly concentrated in bigger tech companies. But, tighter financial conditions and troubles in the banking sector risk hurting smaller firms, and could lead to a broader weakening of the labor sector. If that were to happen, the job market could deteriorate more rapidly than most investors believe, and test investors’ main narrative that a soft landing scenario might still be in the cards.