There's a 'disturbing' pattern flashing in the US labor market, a veteran market strategist says
NYSE
- There's a 'disturbing' disconnect between job growth & profits expansion in the US, Jim Paulsen says.
- The veteran strategist said that profits have accelerated since the pandemic, while job growth has slowed.
- He said he was growing concerned about the risk of a "jobless" economic recovery.
The US job market could be headed down a troubling path, Jim Paulsen says.
The veteran strategist and former chief investment strategist at The Leuthold Group said he was eyeing an unusual disconnect related to the labor market: while job growth has remained relatively flat in recent years, corporate profits have accelerated.
That could raise the risk of a jobless economic boom — an uncommon configuration in which GDP expands despite little to no new hiring, Paulsen wrote in a Substack post on Monday.
"Wall Street has been celebrating this seemingly untouchable perpetual profit cycle with persistent gains in the stock market," Paulsen wrote of the profits trend. "I am becoming concerned by a disturbing trend not widely discussed — a profitable but jobless economic expansion!" he said.
Corporate profits have been "unrelentingly strong" since the pandemic, Paulsen said. Profits after tax came in at a record $3.7 trillion at the end of last year, according to the US Bureau of Economic Analysis.
Historically, business profits have accelerated alongside other economic indicators, such as real GDP and job growth, but payroll gains have ground to a halt in recent years, with the labor market seeing near-zero net job growth in 2025.
Payroll data has been noisy, with some months being particularly weak. The US added 178,000 jobs in March, beating expectations, but unexpectedly lost 92,000 jobs in February.
One reason profits may be accelerating is due to the success of the tech sector in recent years relative to other areas of the economy, Paulsen said. He pointed to the 12-month trailing profit margin of information and tech stocks in the S&P 500, which has significantly pulled ahead of margin growth in the broader index since the pandemic.
Many tech firms have also announced "significant" staffing cuts in recent years, another reason profit margins may be rising, he added.
"What is most concerning about the last few years is growing evidence that innovations may be lessening conventional US economic codependency which traditionally has kept the capitalistic system sustainable. If companies can perpetually raise profitability simply by cutting staffs without any codependency backlash, the economic system is no longer self-sustaining, is it?" Paulsen wrote.
Paulsen said he expects "significantly enhanced economic policy accommodation," such as by the Fed cutting interest rates or the lawmakers approving more fiscal stimulus, if the disconnect between profits and other economic indicators were to "break" the economy in some way.
"This should help provide a cushion under the economy and cause the stock market to deliver solid returns before 2026 is over. For now, I remain nervous but bullish," he added of the trend's possible implications.
Other economists have flagged what appears to be a growing disconnect between the job market and growth in other areas of the economy. Last year, Goldman Sachs said it saw the potential for the economy to enter an era of "jobless growth" driven by AI's productivity gains.
In the past, a divergence between job and economic growth has been observed in the years surrounding a US recession, top economist Mohamed El-Erian said.