Conor Sen: Worker pessimism is part of the U.S. economy now

American workers are in a pessimistic mood. Who can blame them? A gradually cooling labor market and persistent affordability challenges make too many feel like it’s impossible to get ahead. And unlike our experience of the past 25 years, a job market boost alone wouldn’t necessarily be enough. In housing and other areas, workers need greater supply and lower prices, which simply adding more jobs won’t achieve.

The still low unemployment rate fails to capture worker pessimism. People’s feelings about the job market hinge on their experience of it and how that shapes their expectations of the future. On that basis, there’s reason for concern. The percentage of workers between the ages of 25 and 54 who are employed peaked a year ago. The rate at which companies hire workers has been low since the latter part of 2023 and is reflected in the Conference Board’s monthly consumer confidence report where 20% of respondents now say jobs are hard to get.

In July, the number of unemployed people surpassed the number of job openings in the economy for the first time since 2021. That raises the possibility that employers could become more willing to lay workers off since they’d have an easier time staffing back up when needed than they would have over the past several years. It’s reasonable for those in the workforce to worry about job security and the difficulty of finding a new position if their current role is cut.

Even if we were at a low point in employment trends (perhaps companies will hire more once tariff uncertainty ends and with the passage of the One Big Beautiful Bill), the other challenges workers are dealing with wouldn’t really be resolved. This is a change from the 2000s and 2010s. Back then, whenever the labor market was weak, it was usually in an environment of low inflation, low interest rates and reasonable housing affordability. Any boost in job creation quickly translated into a boost to the housing market and greater consumption elsewhere, creating a virtuous cycle.

Now, the labor market is cooling slowly in an environment of elevated inflation and interest rates and poor housing affordability. To the extent that we’ve made some downward progress on inflation and rates, it’s partly thanks to deteriorating employment prospects. Federal Reserve Chair Jerome Powell said at Jackson Hole, that “risks to employment to the downside” may warrant a policy adjustment. In other words, it’s concern about a worsening labor market that has put the Fed in a position to consider rate cuts even though inflation is above their 2% goal.

A labor market rebound, however, would likely push inflation somewhat higher and eliminate the need for easier policy rates. It might even send longer-term interest rates – and importantly, mortgage rates – higher.

Apart from affordability, workers are also contending with uncertainty about the path of artificial intelligence. If the hundreds of billions of dollars being spent on AI turn out to be a good use of money, it will presumably displace a lot of workers from software engineers and lawyers to customer service executives. And if the money doesn’t end up being a good use of resources, there will probably be a bust that drags the economy into a recession. An AI coin toss of “heads I lose my job, tails there’s a recession” doesn’t seem like a great scenario for most workers.

Between housing and AI’s workplace impact, it’s the housing affordability picture that should clear first. The market continues to return to balance, even if the speed of the normalization has been slow. Rising inventories and stagnating or declining home prices in much of the country combined with continued wage growth mean that the market is moving in the direction of buyers.

It is much harder to estimate how soon we’ll get some resolution to AI uncertainty, but it seems unlikely that we’ll remain in an environment of booming investment but low levels of layoffs indefinitely. As things stand, affordability-constrained workers will continue to spend on essentials and day-to-day living, but pessimism about the future will be hard to shake.

Conor Sen is founder of Peachtree Creek Investments.