The U.S. economy has recently experienced a "glitch" in the usually strong relationship between growth and employment, according to analysts at Deutsche Bank Research.
In their note, analysts including Matthew Luzzetti and Brett Ryan argued that in the period before the COVID-19 pandemic, changes in the pace of hiring in the United States were "significantly positively correlated" with the expansion of economic activity.
From 2002 to 2019, just before the health crisis began, the correlation was 84%, they noted.
After the pandemic, this correlation weakened, which they described as an "understandable" phenomenon, given the shocks associated with COVID. However, they added that "the persistence of this discrepancy over the past two years is remarkable."
"Even as economic growth picked up and remained broadly steady, hiring trends remained weak," they wrote.
This trend had serious consequences, the analysts added. The Federal Reserve cut interest rates several times last year to support a weakening labor market, even though growth remained steady and inflation exceeded the central bank's 2% target.
Against this background, the Fed decided to keep rates at 3.5% to 3.75% last week, and it is not expected that any changes will be made to monetary policy until the end of this year.
Meanwhile, weak hiring contributed to a gloomy perception of the broader economy among households, analysts said.
"Therefore, we consider the potential resolution of this discrepancy as a critical factor for the Fed's prospects and, possibly, the outcome of the midterm elections," they said.
If hiring trends converge with growth again, the labor market will strengthen, and the Fed is unlikely to cut rates until inflation demonstrates that it is clearly moving back to 2%, they predicted. An improvement in consumer sentiment could be a good sign for Republicans ahead of the midterm elections in November, they noted.
But if the opposite happens and growth slows in line with hiring, the job situation will remain weak, they said.
"In this environment, the Fed may cut rates again to support the labor market, and household sentiment about the economy is likely to remain subdued. Such an outcome may be more favorable for the Democrats' chances in the midterm elections," analysts say.