While the war in Iran wreaks havoc on the stock market, the real economy is also showing signs of stress, particularly in the labor market.
This week, the Federal Reserve Bank of New York released its February 2026 Survey of Consumer Expectations, which showed that while short-term inflation expectations have declined, labor market expectations decreased, and confidence in finding a new job also fell.
Economists have been warning about a K-shaped economy for months.
A K-shaped economy is a situation in which, following a downturn, the economy recovers in an unequal manner. Specifically, higher-income employees and industries thrive amid rising asset prices, while lower-income employees and industries are burdened by inflation, debt, and weak growth.
According to Bank of America, since the Covid pandemic, national accounts data have shown a sustained increase in productivity easily reflected in rising corporate profits.
However, at the same time corporate profits are rising, labor income has steadily fallen as a share of U.S. GDP, creating the K shape that could define the U.S. economy for the foreseeable future.
“For now, higher profits relative to wages are yet another driver of a K-shaped economy, as higher-income consumers tend to be more exposed,” according to BofA Securities.
“Measured labor productivity (that is, output per hour) continues improving since the end of the pandemic and is mostly concentrated in the services sector rather than manufacturing. Interestingly, real labor income is not growing at the same pace,” according to BofA.
“In other words, productivity gains translate into higher corporate profits. This dynamic implies a higher share of the GDP pie going into corporate profits relative to labor income.”
The New York Fed’s survey shows that while American families expect inflation to slow down, they also expect a tough labor market in 2026.
Consumers are less confident about finding a new job, NY Fed says
U.S. workers have a mixed view of the labor market, according to the latest survey from the Federal Reserve Bank of New York. While they feel secure in their current jobs, they also don’t trust the labor market to support them if they’re let go.
The number of people expecting to lose their jobs in the next 12 months fell 1% to 13.8% in February, but the perceived probability of finding a new job within three months, should they be fired, also fell by 1.6% to 44%, just above the series low that was recorded in December.
Related: February unemployment takes unexpected turn following week of war
With that scary possibility in their minds, it makes sense that the number of people expected to quit in the next 12 months also dropped by 2.8% to 15.9%, a new survey low.
The NY Fed’s Survey of Consumer Expectations is an internet-based survey of a rotating panel of about 1,200 household heads. Respondents participate in the panel for up to 12 months, giving the researchers a long-term view of their feelings about the economy.
The respondents were more optimistic about other aspects of the economy, especially regarding debt payments.
The average perceived probability of missing a minimum debt payment over the next three months fell by 2.1% to 11.6%, the lowest level seen in two years.
February BLS jobs report shows the U.S. cut 97,000 jobs
U.S. employers cut 97,000 non-farm payroll jobs in February, a month when analysts were expecting the economy to add 55,000 jobs. The unemployment rate ticked up to 4.4% from 4.3% the previous month.
While the unemployment rate is slightly below the 4.5% that registered a year ago, the number of people who have dropped out of the labor force is up, as is the number of people who currently want a job.
Related: Oil spike sends powerful message for everyone
The job losses were wide-ranging, and even health care, which has been a bright spot in the employment economy, saw a downturn in the month.
“There really is not much good news coming out of the employment report,” Scott Helfstein, head of investment strategy at Global X, said in an email to TheStreet.
“There were declines in almost every category. Transportation, manufacturing, construction, information, and business services were all down. Healthcare had been propping up the numbers, but a large strike sent those numbers lower as well.”
However, despite the dismal outlook, Helfstein saw a silver lining in the February jobs numbers.
“There is not much good news in the jobs report, given the broad-based declines, but there is a contrarian take,” he said. “Total jobs are still above the long-term trend, so the present downsizing is actually more of a rightsizing.”
The weaker-than-expected jobs report reflects a possible impact of higher oil prices, Helfstein added. “Sharp increases in oil prices typically coincide with labor force reductions. When oil prices spike by 20%, the U.S. typically loses jobs, and that is the current scenario.”
Related: Americans pay at the pump in fastest gas price increase in 20 years
