Is the Economy Healthy?

https://www.youtube.com/watch?v=sA8MkHkDBrc

The state of the economy matters deeply to long-term investors, as it directly influences portfolios and financial plans. Recent data has delivered mixed signals, leaving many investors uncertain about how to interpret the current landscape and asking the question, "is the economy healthy?"

My wife and I get our blood drawn and reviewed by our physicians at regular intervals so we know what a ‘baseline’ is for our bodies. It allows us to know when we’re our own body is out of alignment, relative to itself. In the same way, investors benefit from looking at a range of economic indicators rather than focusing on any single data point so we can identify what ‘healthy’ looks like, broadly speaking. Payrolls, inflation, and GDP each contribute a piece of the puzzle. Today's headline figures are broadly encouraging: GDP growth has exceeded expectations, inflation is moderating, and unemployment remains low by historical standards. Nevertheless, a closer look at the labor market reveals a more nuanced picture that long-term investors should understand.

The labor market is at an inflection point

Interpreting labor market data has been complicated in recent months by government shutdowns, adverse weather, and other disruptions. One of the most notable shifts is the change in the balance between job seekers and available positions. As the chart above illustrates, the post-pandemic era saw more job openings than unemployed individuals from mid-2021 until last summer, with the ratio reaching as high as two openings per job seeker in 2022. Today, approximately 7.4 million Americans are unemployed while only 6.5 million positions remain unfilled—the lowest level of job openings since late 2020.

The January jobs report offered a brighter note, showing 130,000 jobs added—nearly double analyst expectations—with gains concentrated in health care, social assistance, and construction. The unemployment rate edged down to 4.3% from 4.4%. However, the Bureau of Labor Statistics’ annual revisions revealed that total job creation over 2025 amounted to just 181,000, or roughly 15,000 per month, the weakest annual total since 2020. Meanwhile, a historic decline in net international migration—from approximately 2.7 million in 2024 to about 1.3 million in 2025—alongside an aging workforce, has helped limit upward pressure on the unemployment rate by reducing labor supply alongside demand.

Jobs, inflation, and the broader economy

The labor market draws significant investor attention because it directly affects household income, consumer confidence, and spending—factors that collectively account for more than two-thirds of U.S. GDP. Yet jobs are only one dimension of the economic picture. Inflation data adds further context: the Consumer Price Index rose just 2.4% over the past year, while core inflation decelerated to 2.5%, its lowest level in nearly five years.

A “supercore” measure that also excludes shelter rose only 2.1% over the same period.

This progress brings the Fed closer to its 2% target. While high prices continue to weigh on many households and retirees—since slower inflation does not mean prices actually decline—the containment of price pressures is a positive development for both stocks and bonds.

What the economic picture means for portfolios

The current combination of steady growth, cooling inflation, and a softening labor market can create a “Goldilocks” environment that supports both stocks and bonds. The market has responded to recent employment and inflation data with declining interest rates across the yield curve, with the 10-year Treasury yield just above 4%. Market-based measures currently imply at least two rate cuts this year, and the prospect of a new Fed chair appointed by President Trump adds further weight to this outlook.

Lower interest rates reduce borrowing costs for businesses and increase the present value of future corporate earnings, while also boosting the value of existing bonds. Even if rates hold steady, bonds continue to offer attractive yields as a stabilizing force for long-term investors. Corporate earnings growth remains another key pillar supporting the broader market.

For investors, it's important to always remember the data. The labor market is cooling but the broader economy is healthy. For investors, this mixed backdrop supports a balanced approach and reinforces the importance of long-term thinking when it comes to portfolios and financial plans.

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