Despite a turbulent stock market and the continued prospect of a full-on trade war, the labor market remains remarkably strong. The job numbers for the final month of 2018 are indicative of this. The economy added 312,000 jobs in December of 2018, within striking distance of doubling the paltry 176,000 projected by economists surveyed by Dow Jones. The jobless rate edged up to 3.9 percent, despite these massive job gains, but in a near-full employment economy this only means that more disaffected workers are returning to the job market and seeking work for the first time in many months, increasing the labor force participation rate and helping additional marginal workers enjoy the fruits of the longest expansion in the job market in U.S. history.

Does this mean the overall economy is as strong as labor markets would indicate? Perhaps, but we would do well to remember that labor markets typically trail other indicators of coming economic recession. This is because workers get laid off and even exit the labor force only after poor business cycle conditions have increased employers’ marginal costs to the extent that they must start reducing employee numbers.

Companies earn money when employees work, and so long as there wasn’t a miscoordination in the original hiring of an employee, and business conditions remain positive, an employer will continue to make that money. But when input prices start to rise, and consumer demand falls off, businesses need to shrink their balance sheets, and often this means cutting payroll by firing marginal employees. What must be emphasized is that input prices rise, consumer demand falls off, and marginal costs increase all before there’s any relevant effect on labor markets. A huge jobs number–such as the one the economy experienced in December 2018–absent an examination of other, leading indicators could just as easily be evidence of having reached the peak of the business cycle, just before a sharp drop into recession.

Evidence from other leading indicators is mixed. The Federal Reserve continues to slowly tighten monetary policy, but not at a dramatic rate of increase in interest rates. The auto industry is in the midst of a massive restructuring, with domestic car makers retooling U.S. plants—those they haven’t eliminated entirely—away from production of sedans and into trucks and SUVs. The follow-on employment effects of this change will surely be large. Furthermore, the degree to which this restructuring was hastened by the rise in input prices resultant from President Trump’s steel and aluminum tariffs cannot be overstated. The auto industry was hit first, but it will not be the last area of the economy to feel the pain of higher prices. Finally, the housing market is flying high but also reaching a plateau that, as in the labor market, might be evidence of a coming cliff.

The verdict: remain as cautiously optimistic as one can in the midst of the longest economic expansion on record. It’s hard to do this because economic cycles follow a particular law of financial gravity: everything that goes up must come down, and we’ve been going up for much, much longer than typically expected. It’s hard to be cautious, too, because the economy is booming right now, even with a volatile stock market and possible darkness of recession on the horizon.

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