Equilibrium. The point where everything is in balance. Think of a scale. Put a one-ounce object on one side and a one-ounce object of the other. They balance. The same would be true whether you use a two-ounce object or even a two-pound object.
Look at the unemployment rate, perhaps the most important economic indicator watched by all in the United States, seared into our collective brains for almost 100 years courtesy of the Great Depression. It has stayed in a tight range of 4.0-4.2% for over a year. Likewise, weekly unemployment claims, those signing up for unemployment insurance each month, have also stayed in a tight range of 210,000-240,000. But look at continuing claims, the cumulative number of people still on the unemployment rolls. They have been inching up by over 100,000 or a bit over 5% since mid-April. Meanwhile, the number of job openings has declined by 39% since April 2022. No wonder college grads and white collar workers are having such a difficult time finding a job. The labor force participation rate has declined from 62.8% to 62.2% over the past two years. That seems like a small change on the surface but it represents hundreds of thousands of Americans who have dropped out of the labor force. The majority of that change coincides with the aging of our population. Using a wider lens, the participation rate has dropped a full five percentage points since the beginning of the 21st century.
That’s a lot of numbers. But if you try to piece them together, while it suggests equilibrium if one simply looks at the unemployment rate, what it really shows is that equilibrium is achieved by fewer Americans seeking and obtaining fewer jobs. Add immigration into the mix. In 2023 and 2024 total immigration totaled almost 5 million when the southern border was wide open. Now that it is closed, that number in 2025 will be well under a million. Combine that with a declining birthrate and aging population and you quickly come to a conclusion that our labor market isn’t growing very much or at all. Balance is achieved as fewer potential workers seek fewer available jobs.
One measure of GDP growth is population growth times the rate of productivity improvement. Population growth (annualized), for all the reasons just mentioned, fell from 0.98% in June 2024 to the most recent reading of 0.56%. Such a drop, which will likely continue in the months ahead, would require a significant and sustainable increase in productivity. Productivity changes bounced around quite a bit but over the last 75 years has averaged close to 2%. The most recent reported number for the second quarter of 2025 is 1.2%. AI may lead to better productivity down the road but it isn’t reflected in the data yet.
Bottom line is that the labor market is growing at a subdued pace although it remains in balance meaning there isn’t upward pressure on wages. Good for inflation but no so good for those trying to get ahead in life. Struggles finding work show up in the upward creep of continuing unemployment claims.
Let me switch from labor to housing. Housing starts have been anemic for decades. If equilibrium is exemplified by average home prices, there exists pretty good balance today after a sharp spike post the Covid pandemic. Very low mortgage rates from the past decade have kept the supply of homes for sale low amid resistance to give up 3% mortgages. High current mortgage rates plus the impact of home price inflation in the 2019-2024 period has squashed demand. Again, fewer homes for sale and fewer buyers create an equilibrium. But it’s not a sign of a healthy housing market. Housing starts today are about the same level as they were in 1960 while U.S. population has almost doubled. Americans are less mobile in part because they either can’t sell their existing homes for the price they want, or can’t afford a new home where they want to move. With housing starts stagnant, the only growth in the housing industry for over half a century comes from higher prices. A frozen housing market shows up in the form of reduced mobility. Americans are staying in their homes longer, either by choice or, more likely, because of economic factors.
Finally, I want to turn to a third area of balance, the yield on 10-year Treasury bonds. For almost two years it has stayed within a narrow range of 4.0-4.5% with little variation. 10-year yields reflect 10-year inflation expectations. They have been anchored. Despite all the political machinations, tariffs, threats against Fed independence, higher national debt, record corporate earnings and a weaker dollar, yields have stayed remarkably consistent. What is that telling us? For one, it suggests long-term inflation expectations have been well anchored. I have no clue who will be guiding the ship six weeks, six months, or two years from now, but markets have been saying that however the Fed and Treasury reach decisions, markets haven’t seen enough of a reason to raise or lower long-term inflation expectations sufficiently to cause a meaningful change in long-term bond returns. However, if future policy chooses to tolerate more inflation as a price for faster growth, that may all change. But, for now, that’s a hypothetical that markets are not ready to embrace.
Let me try and pull this all together.
• First and foremost, there are no signs at the moment that suggest recession. Slower growth, perhaps, but not enough to scream the R word.
• When a labor market or housing market is smaller or growing at a more subdued pace, changes can have an outsized impact. A lower birth rate, less immigration, and an aging population are all headwinds that will require greater productivity in the months and years to come. Less regulation and technology advances will offset the headwinds. At the moment there is balance, but balance can be skewed either way quickly.
• Housing is a big problem and getting bigger. Look at the coming election for mayor in New York. If the election were held today, avowed socialist Zohran Mamdani would win in a landslide. Why? Because (1) he has identified the problems most paramount to voters and (2) he has offered a solution. Whether that solution proves right or wrong, at least it’s an effort to solve the key dilemma, how can one afford to live in New York. Housing affordability has become the number one concern and soon it will be the number one concern for many more parts of our country. Solving the problem will require public/private partnerships working together. Rent freezes won’t increase supply, especially against a backdrop of rising real estate taxes. Increasing supply isn’t simply building more structures, it will have to be done by rehabbing or repurposing real estate in creative ways.
• A little over a year from now we will have mid-term elections. President Trump has set his agenda. He has restructured the tax code, imposed tariffs, taken steps to reshore manufacturing, reduced regulations, and closed our southern border while pursuing an expansionary fiscal policy and pressing the Fed to lower short-term rates faster than the present Board may like. How this all plays out will be reflected next fall. Americans vote with their wallets. If you look at the stock market for clues, given near record prices, investors are voting with optimism. But the investor class is only part of the electorate. Data suggests lower- and middle-class Americans are struggling more than the investor class. It’s harder to find a job, wages are barely keeping up with inflation, and too many are squeezed out of the housing market.
• Traditional inflation readings measure changes in the prices we pay for goods and services. Changes in asset values are not reflected in the computation. But asset prices also have to find their balance just as we have discussed for the labor, housing and bond markets. Rising stock markets not only reflect higher earnings, but also the weaker dollar, an increase in retail participation in the stock market, and broader optimism as measured by near record price-earnings ratios. Earnings growth alone can be a persistent tailwind, but increased speculative fever isn’t a one-way street.
For now, there are reasons for cautious optimism with the caveat that changes in the labor market, housing market, yields on long-dated Treasuries, and speculative enthusiasm can quickly change the optimism to pessimism.
Today, Salma Hayek turns 59. Former US Open champ Jimmy Connors is 73. Former baseball commissioner Peter Ueberroth turns 88.
James M. Meyer, CFA 610-260-2220