Some economists are warning that the US labor market could be in a “calm before the storm,” based on a closely watched—but often overlooked—model: the Beveridge curve.
The December nonfarm payrolls report showed the US added 50,000 jobs last month, and the unemployment rate ticked down slightly to 4.4% from 4.5%. But the Beveridge curve, which tracks the relationship between unemployment and the job vacancy rate over a labor market cycle, suggests trouble may be ahead.
Historically, as the job vacancy rate declines—indicating fewer available jobs—the unemployment rate eventually hits a tipping point and rises sharply. Using 2022 and 2023 as the peak of the most recent labor cycle, the job vacancy rate has already dropped to 4.6%, signaling conditions may be ripe for unemployment to climb.
Neil Dutta, chief US economist at Renaissance Macro Research, shared a chart in December showing the current cycle in teal dots, highlighting why he believes downside risks to the labor market outweigh upside risks for inflation.
So far, hiring and layoff rates have remained low, keeping unemployment relatively stable. But economists warn that even a modest rise in layoffs could push unemployment higher, given the scarcity of job openings.
Matt Bush, US economist at Guggenheim Investments, said, “Because hiring is so low right now, it wouldn't take a big increase in layoffs to see unemployment rise meaningfully. Any small shock to business confidence could trigger a rapid increase in layoffs. It’s not our base case, but it’s a key risk we’re watching.”
Peter Berezin, chief global strategist at BCA Research, pointed to another indicator tied to the Beveridge curve: the jobs-to-workers ratio, which is now negative. “The US labor market has reached a critical threshold: there are now more workers than total jobs, signaling we’re on the flat side of the Beveridge curve. A further decline in job openings could push the economy toward recession,” he wrote.
Other signs of potential weakening include the unemployment rate recently moving above its three-month average—a pattern historically seen only during or just before recessions—and the Conference Board’s “labor differential” measure trending higher. This metric tracks whether survey respondents perceive jobs as “plentiful” or “hard to get” and generally moves alongside unemployment.
For now, however, the labor market remains stable. Bush noted, “It’s reassuring that we’re not seeing a spiral where slower job growth leads to lower spending, which then triggers more layoffs. Labor supply is cooling alongside labor demand, which may be helping prevent a recessionary snowball effect.”