This chart shows the U.S. labor market is running on fumes. Why that's a risk for the stock market.

TS Lombard's Dario Perkins says this chart helps explain why the Fed has started cutting rates again In the U.S., hiring has slowed to a remarkable degree. A weakening U.S. labor market is a risk for both the U.S. economy and markets right now. But the most closely watched numbers - the rate of new jobs created and the official unemployment rate - don't tell the full story. For that, Dario Perkins, an economist with TS Lombard, has a chart that, according to him, offers a more compelling justification for why the Federal Reserve started cutting interest rates again in September after a nine-month pause. The six-month rate of change in "core" jobs, which Perkins defines as the U.S. payrolls figure excluding government and healthcare, has slowed to just 0.02%, leaving it barely in positive territory. As presented, the data clearly show that the central bank had good reason to restart rate cuts, Perkins said. It undercuts the argument that pressure from the White House exerted undue influence on the Fed's decision-making process. The data also highlight the uniqueness of the current state of the labor market. Since at least the early 1960s, there has never been a time when labor-market growth, based on this measure, has stalled out for months on end. Usually, a slowdown in hiring is followed by rising layoffs and a recession. In the past, when the pace of job creation has fallen to zero, or slipped below it, a recession has typically been under way. Another important detail highlighted by this chart: Over the past year, the U.S. economy has depended more heavily on the healthcare sector as an engine of job creation. According to Eric Pachman, chief analytics officer at Bancreek Capital Advisors, jobs in healthcare and social assistance accounted for a whopping 87.3% of total private payroll growth in 2025. That is the highest share in recent memory. Some stock-market strategists have warned that a more pronounced slowdown in the labor market could be a potential risk to corporate earnings - and, by extension, U.S. stocks. At the same time, others have taken the opposite tack, warning that stronger-than-expected data could carry risks of its own, by forcing investors to rethink expectations for more Fed rate cuts. In either case, the risk to investors' portfolios is compounded by the fact that U.S. equity valuations are currently high relative to history. "The S&P 500 SPX is trading at a 27 times earnings, which is historically high, thus investors may be even more sensitive to upcoming economic data than usual," Kathleen Brooks, research director at XTB, said in commentary shared via email. A cut to the central bank's policy-rate target in September helped revive confidence that the U.S. economy will remain on solid footing. It also appears to have given stocks an added boost by helping to ward off another September market slump. September has historically been the weakest month of the year for returns in the stock market. Concerns that consumers are feeling the pinch remain, although the picture painted by official data and executives' commentary has been mixed. Some see signs that, after four years of inflation running above the Fed's 2% target, consumers with lower incomes and fewer assets are beginning to struggle. Data on spending and income released last week showed both rose at a healthy clip in August. That wealthier consumers are driving much of these gains has been cited as one potential vulnerability. This could quickly become a bigger problem for investors if layoffs start to pick up, Bancreek's Pachman said. Consequences for markets and the broader economy would likely be unavoidable at that point. Executives at McDonald's Corp. (MCD), Dollar General Corp. (DG), Walmart Inc. (WMT) and other firms have observed that spending from lower-income customers has started to drop off. Data from the New York Fed showed consumer-credit delinquencies for student loans, credit cards and auto loans remained elevated in the second quarter. So far, GDP growth appears to be holding up despite some softness in the labor market. After a slowdown in the first quarter driven primarily by a surge in imports, the latest estimate of growth in the second quarter came in at 3.8% last week. That was stronger than economists had expected. But a chart from Deutsche Bank recently showed that the U.S. economy has become increasingly reliant on AI-related spending. Without AI, a recession might have already begun. -Joseph Adinolfi This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

This chart shows the U.S. labor market is running on fumes. Why that's a risk for the stock market.

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