High-Interest Rates: Will the Job Market or Spending Weaken First?

The ongoing economic conundrum of the chicken-and-egg scenario presents itself with particular poignancy: In the face of interest rates at their highest in 22 years, what will give way first – the job market or consumer spending?

The dynamics are intricate. Reduced consumer spending can exert a double squeeze on companies: as their profits dwindle, they have less to allocate to their workforce, leading to potential layoffs. Conversely, a reduction in staffing levels can trigger a domino effect, curtailing consumers’ purchasing power.

Thus far this year, the heartening news is that consumers have maintained their spending habits, and businesses have continued their hiring spree. But the question that arises is – why?

Economists are divided in their explanations. On one side of the coin, there’s the assertion that a robust job market has been propelling substantial consumer spending. Conversely, the opposing argument holds that strong consumer demand has been instrumental in facilitating businesses’ successful hiring endeavours.

It is crucial to acknowledge that consumer spending accounts for a substantial 70% of the United States’ economic output. Consequently, it serves as an invaluable barometer of the nation’s economic well-being and its trajectory.

The complexities of this situation make it difficult to determine whether spending or hiring will begin to falter. Various factors come into play, including the impact of pandemic-induced savings, with some higher-income individuals still holding significant savings, lingering pent-up demand for specific goods and services, and the variations in broader economic conditions from one business cycle to the next.

While the US job market has undeniably shifted gears from its rapid pace in 2021 and 2022, following its ascent from pandemic-induced lows, it remains sturdy.

For several months now, the US labour market has been transitioning to a slower pace, a trend further underscored by Friday’s jobs report.

According to the Bureau of Labour Statistics’ data for October, the US economy added 150,000 jobs. While this figure fell short of expectations, it still marked a commendable month in terms of employment growth.

October’s job creation may have lagged behind September’s tally, which was stronger than initially anticipated, but it remains well above the minimum job gain required to keep pace with population growth, estimated to fall within the range of 70,000 to 100,000. Furthermore, unemployment continues to register at low levels, and job openings persist at historically elevated figures.

It is worth noting that as the labour market gradually cools, income may begin to decelerate. Consequently, consumer confidence in job security could wane, ultimately affecting consumer spending. This, in turn, may usher in layoffs due to the diminished demand.

The counter argument posits that there have been instances where spending took a hit before the job market. A prime example is the sequence of events that led to the Great Recession in 2008. The initial catalyst was the housing market’s collapse, which, in turn, significantly impacted consumer spending.

Shifting our focus to the EURUSD pair’s recent performance, it presents a captivating narrative. The euro has notably surged against the US dollar over the past few days, culminating in a noteworthy spike during Friday’s trading session. This surge underscores the intricate and interconnected nature of the global economy, where events and trends in one part of the world can reverberate globally.

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This article represents the opinion of the Companies operating under the FXOpen brand only. It is not to be construed as an offer, solicitation, or recommendation with respect to products and services provided by the Companies operating under the FXOpen brand, nor is it to be considered financial advice.


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