U.S. Economic Analysis: Labor, Inflation, Markets, and Liquidity (Data 1970s–2025)
Labor Market Trends (1970s–Present)
The U.S. labor market today reflects several long-term structural shifts. Full-time vs. part-time: In the late 1960s only ~13.5% of employees were part-timers; that share has risen to 17.4% by early 2025advisorperspectives.com. Recessions tend to spike involuntary part-time work – for example, part-timers peaked at 20.1% of employment in January 2010 during the Great Recessionadvisorperspectives.com. After recovering in the 2010s, the full-time share remained high through the 2020 COVID shock, but recently a subtle reversal has emerged: full-time employment slipped below 83% in late 2023 as part-time work edged above 17%advisorperspectives.com. This suggests a slight uptick in part-time jobs relative to full-time, which can indicate some deterioration in job quality (more workers settling for part-time roles).
Labor force participation: The overall labor force participation rate (LFPR) climbed from about 60% in 1970 to a peak of 67.3% in early 2000 as women entered the workforce in large numbersbls.gov. Since 2000, however, LFPR has steadily declined due to population aging, higher school enrollment, and other factors. It fell to ~62–63% by the mid-2010sbls.gov, plunged briefly in 2020, and stands at 62.5% as of March 2025bls.gov. That level is roughly comparable to the late 1970s, effectively undoing decades of gains. In demographic terms, male participation has trended down (from ~78% in 1970 to 69% by 2020) while female participation rose (43% in 1970 to 61% in 2000)prb.org, narrowing the gender gap. The net result is an available workforce share similar to 50 years ago, which may constrain economic growth.
Work hours: The average work week has become shorter over time. In the mid-1960s, the typical private-sector worker put in ~39 hours, whereas today the average is around 33.8 hours per weekadvisorperspectives.com. This decline reflects the shift toward service jobs, more part-time roles, and possibly improved productivity allowing shorter hours. Notably, average weekly hours hit a low of ~33.0 in 2009 during the recession and briefly again in 2020, then bounced back to ~34+ in 2021 before recently easing to 33.8advisorperspectives.com. Fewer hours worked per employee can indicate more workers are part-time or on reduced schedules, another aspect of labor utilization.
Real wages and earnings: By several measures, the inflation-adjusted earnings of the typical American worker have stagnated over the long run. Median usual weekly earnings for full-time workers have barely risen in real terms since the late 1970sepi.org. One analysis finds that the median hourly wage in 2013 was only 6% higher (in real dollars) than in 1979epi.org. More recent data show a similar story: the “middle-class” worker’s real annual earnings (using CPI-adjusted average hourly pay and hours) are actually about 5.9% lower than 50+ years agoadvisorperspectives.com. In other words, a typical full-time worker in 2025 has roughly no more purchasing power – and possibly slightly less – than their counterpart in the early 1970s. This remarkable flatlining of real wages over decades, despite economic growth, signals weak growth in labor income for the median worker. It also suggests that most gains from productivity or GDP growth have not translated into higher pay for the broad workforce.
Summary: The labor market’s “quality” trends have been mixed at best. Labor force attachment is lower than it was at its turn-of-the-century peak, and a greater share of workers today are in part-time jobs. The average work week is shorter. And real earnings for typical workers have barely grown over decades, reflecting wage stagnation. On the positive side, unemployment is relatively low (4.2% in March 2025) and prime-age participation remains high; however, the combination of more tenuous employment (involuntary part-time or gig work) and stagnant real pay underscores a long-term erosion in job quality for many. These data suggest that while the headline labor market is “strong” in terms of low joblessness, many workers are not experiencing improving standards of living commensurate with economic growth – a key challenge going forward.
Inflation: Official vs. Old Methodologies
Official U.S. inflation (CPI) statistics have undergone methodological changes since the 1980s that tend to show lower inflation than earlier methods would. Notably, since 1980 the Bureau of Labor Statistics (BLS) has introduced adjustments for consumer substitution (buying cheaper alternatives when prices rise) and quality improvements (hedonic adjustment) in goodsfedsmith.com. These changes mean today’s Consumer Price Index (CPI-U) grows more slowly than the index calculated by prior formulas. For example, the CPI once directly tracked house prices; now it uses owners’ equivalent rent, dampening housing inflation in the index. Similarly, improvements in product quality (e.g. a faster computer for the same price) are now accounted as effectively price reductions. The intent is to measure cost of living more accurately, but one consequence is a persistent gap between official inflation and “old-school” inflation measures.
How large is the gap? Analysts who reconstruct CPI using pre-1980 methods find significantly higher inflation rates in recent decades. One estimate: using the 1980-era CPI formula, the U.S. inflation rate for March 2023 would be about 14.1% year-over-year, versus the official ~5.0% CPI-U at that timefedsmith.com. Using a 1990-based methodology yields about 8.3% for the same periodfedsmith.com. This implies that current price increases might be understated – the public’s loss of purchasing power could feel closer to double-digit inflation when measured by the older yardstick. The divergence is illustrated in alternate CPI series (such as those by ShadowStats) which have run well above the official CPI for years.
Over the long run, these definitional differences accumulate. Compounded over decades, even a small annual gap means a big difference in perceived cost of living. For instance, from 1983 to 2023 the official CPI-U shows prices roughly tripled (about +200%), whereas an 1980-style index indicates roughly a seven-fold increase (+600%)【55†】. This suggests that by older standards, today’s dollar buys far less than what official inflation-adjusted figures imply. In practical terms, many households feel inflation has eroded their purchasing power more than the CPI headline suggests – consistent with the data from alternative metrics. It also partly explains why real wage gains appear so sluggish: if inflation is under-measured, real incomes would be overstated.
It’s important to note BLS stands by its methods, arguing that current CPI better reflects true cost of living after accounting for how consumers actually behavefedsmith.com. The methodological changes were not conspiratorial; they were meant to improve accuracy. Even so, from a historical perspective, comparing today’s inflation to the 1970s is tricky. The CPI then was calculated without substitutions or hedonic adjustments – essentially a fixed basket. By that yardstick, some economists say current inflation would indeed register higher. All told, the redefinition of inflation over time means the official CPI likely underestimates “felt” inflation relative to legacy measures. Policymakers and analysts should be cautious when comparing current inflation to past episodes or assessing real wage growth, as the yardsticks have shifted.
In summary, official CPI shows U.S. inflation is back down to ~5% (and ~3% by late 2023) after the post-pandemic surge, but older formulas indicate underlying inflation may be substantially higher – potentially on par with late-1970s levels at its recent peakfedsmith.com. This discrepancy can distort perceptions of purchasing power. Using a consistent yardstick, the purchasing power of the dollar has arguably declined more than official figures alone would suggest, reinforcing public concerns that their incomes haven’t kept up with the true cost of living.
Stock Market Valuation and Breadth
By traditional metrics, U.S. equity valuations are elevated in a long-term context, even after the market’s pullback in early 2025. The trailing price-to-earnings ratio (P/E) of the S&P 500 is currently about 26, well above the historical average ~16.0advisorperspectives.comadvisorperspectives.com. Even using more tempered forward earnings estimates, the S&P 500’s forward P/E is ~22× as of end-2024, compared to a 25-year average of 16× (and a 10-year average ~18×)beckcapitalmgmt.com. In other words, investors are paying $22 for each dollar of coming-year earnings, versus perhaps $16 long-run norm – a rich premium. Another valuation measure, Robert Shiller’s cyclically-adjusted P/E (CAPE or P/E10), reached 34–35 in early 2025, about double its 140-year average (~16–17) and not far from its all-time high (around 44 at the 2000 tech bubble peak)advisorperspectives.comadvisorperspectives.com. These figures underscore that stocks remain expensively priced relative to fundamentals like earnings. High valuations today imply lower expected returns going forward, absent continued earnings growth or low interest rates to justify them.
Crucially, market prices have outpaced underlying earnings in recent years. For much of 2023–2024, corporate earnings growth was flat or modest, yet stock indices surged – meaning the expansion in P/E multiples drove the rally. (For instance, S&P 500 “as reported” earnings per share in March 2025 are around $218 TTM, not dramatically higher than a year priorycharts.com, while the index level until recently was up significantly, indicating multiple expansion.) This reflects a possible divergence between market pricing and fundamentals. It suggests investors have been willing to bid up stocks on hopes of future growth, low discount rates, or simply due to abundant liquidity chasing equities – rather than current earnings strength alone. Such optimism can be fragile if the anticipated growth doesn’t materialize.
Market breadth: A notable feature of the recent bull market was its narrow leadership. A handful of mega-cap technology/growth stocks contributed disproportionately to index gains. In 2023, the “Magnificent 7” (Apple, Microsoft, Amazon, Google (Alphabet), Meta, Tesla, and Nvidia) accounted for virtually all of the S&P 500’s upsidebeckcapitalmgmt.com. This extreme concentration persisted into 2024 – breadth improved slightly, but the largest stocks “still drove the bulk of market action”beckcapitalmgmt.com. An astonishing statistic: Nvidia alone accounted for ~34.5% of the S&P 500’s total return in 2024icis.com, thanks to a meteoric rise in its share price amid AI-related euphoria. This imbalance means the cap-weighted indices masked weakness in the average stock. Indeed, an equal-weighted S&P 500 index lagged far behind the standard index, indicating many stocks underperformed even as the index hit new highs. Such narrow market breadth is often a hallmark of a late-stage rally and can be a vulnerability – if the few darlings stumble, the whole index loses support.
Certain sectors and tickers appear “irrationally” priced relative to fundamental benchmarks. The clearest example has been Big Tech and other growth darlings. All of the top-7 mega-cap firms traded at price-to-sales multiples well above the market average, with NVIDIA reaching an eye-popping 40+ times sales at its 2024 peakforbes.com. Likewise, Tesla at one point sported a P/E well into the triple digits. These valuations assume heroic growth and perfect execution far into the future. Any disappointment could trigger sharp corrections – as seen by Nvidia’s volatility after slight hiccupsmarketwatch.com. Beyond tech, parts of the market like unprofitable speculative stocks (e.g. certain IPOs or meme stocks) also saw bursts of exuberance divorced from current earnings. On the other hand, some segments look unusually cheap: for example, small-cap value stocks have low multiples, reflecting investors’ skepticism and possibly an overshoot in pessimism. This divergence between sectors – hyper-valued tech vs. lagging cyclicals – indicates capital flows have been very one-sided. Investors chasing momentum in a few winners have potentially left bargains elsewhere, again underscoring narrow breadth.
Overall, the stock market sits at rich valuations by historic standards, propped up by a few giants. Such a setup can be unstable. If earnings fundamentals don’t catch up to lofty price levels, or if interest rates rise further (increasing the discount on future earnings), valuations could compress. The concentrated nature of leadership is a risk factor: the S&P 500’s performance is heavily dependent on the fortunes of a handful of companies. Notably, as of early 2025 there are signs of rotation – those big winners have begun to falter and international/emerging stocks are gaining favorfidelity.com. A healthier market would see broader participation. Until then, however, equities remain priced for perfection in many areas, leaving little margin of safety if macro or company-specific news turns negative.
Monetary Policy and Liquidity
The Federal Reserve’s policy stance since 2020 has swung from ultra-easy to tightening, with significant implications for market liquidity. During the pandemic, the Fed massively expanded its balance sheet through quantitative easing (QE), buying trillions in bonds. The Fed’s total assets exploded from about $4 trillion in 2019 to a peak of $8.9 trillion by April 2022wolfstreet.com (“Pandemic” spike in the figure below). This flood of liquidity (along with near-zero interest rates) supported financial markets and the economy during the crisis. However, by late 2022, facing the highest inflation in 40+ years, the Fed pivoted to aggressive monetary tightening. It began raising the federal funds interest rate from effectively 0% in early 2022 to above 5% by mid-2023, the fastest hiking cycle in decades. This rapid increase in short-term rates was intended to cool inflation and has brought borrowing costs to their highest since 2007.
Simultaneously, the Fed initiated Quantitative Tightening (QT) in spring 2022, allowing assets to roll off its balance sheet. As a result, liquidity has been draining out of the system. The Fed’s balance sheet has contracted by about $2.24 trillion (−25%) from its peakwolfstreet.com. By April 2025, total Fed assets are down to $6.7 trillion, the lowest since early 2020wolfstreet.com. (Roughly half of the emergency QE from 2020–21 has now been unwound.) The chart below illustrates this reversal of liquidity: after the “raging inflation” spike, the line turns down sharply as QT progresses.
Figure: Federal Reserve total assets, 2008–2025 (in trillions of USD). Major phases annotated (QE during crises, QT periods). The balance sheet peaked near $9T in 2022 and has fallen to ~$6.7T by Q2 2025 with ongoing QTwolfstreet.com.
Notably, the Fed’s assets-to-GDP ratio has dropped to ~22%, back to 2013 levelswolfstreet.com, indicating that the extraordinary monetary support is being pulled back. This withdrawal of liquidity generally tightens financial conditions – fewer excess reserves in the banking system and potentially less exuberance in asset markets. We saw some effect in 2022–2023 as equity multiples compressed when rates rose and QT started. However, markets were remarkably resilient, partly because other sources of liquidity filled the gap. (For instance, the U.S. Treasury’s spending from its cash account and continued foreign capital inflows may have offset some Fed tightening.)
In late 2024, with inflation coming off its peak, the Fed eased off the brakes slightly. According to market commentary, the Fed enacted roughly 1% of rate cuts in 2024 (four quarter-point cuts) after having overshot neutralbeckcapitalmgmt.com. By early 2025 the fed funds target sits around the mid-4% range – still high, but off the peak. These initial cuts aimed to engineer a soft landing as price pressures cooled. Nonetheless, policy remains restrictive: real rates are positive and the Fed is still shrinking its balance sheet at a measured pace. Interest rate trends overall have thus been upward: both short-term and long-term rates rose significantly from 2021 to 2023 (the 10-year Treasury yield, for example, climbed from ~0.5% in 2020 to ~4%+ by 2023). Elevated yields increase the cost of capital for businesses and consumers, which is slowing interest-sensitive sectors like housing. They also provide competition for stocks (higher bond yields make stocks slightly less attractive by comparison).
A crucial and somewhat independent driver in markets has been the role of passive investment flows, especially into index ETFs and funds. Despite the Fed’s QT, investor money has continued pouring into equities via passive vehicles, providing ongoing liquidity to stock markets. 2024 was a record year for ETF inflows – an estimated $1.12 trillion flowed into U.S.-listed ETFs in that year aloneetf.commarkets.businessinsider.com. The bulk of these inflows went into passive index funds. (Notably, active ETFs made up only ~18% of 2024’s inflows, with passive strategies capturing the restfinance.yahoo.com.) This massive wave of capital into index-tracking funds means a mechanical bid under big index constituents: as money flows in, the funds buy stocks in proportion to index weights, often regardless of valuation. That dynamic has been a supportive liquidity factor for the large-cap market even as the Fed was tightening. It also helps explain the aforementioned narrow breadth – the largest index stocks benefited the most from passive inflows. Passive equity funds now represent nearly 60% of the U.S. equity fund market by assetsapolloacademy.com, a stunning rise that reflects investors’ preference for low-cost index investing. While this democratizes investing, it can lead to distortions: prices of heavily indexed stocks can disconnect from fundamentals due to relentless inflows, and volatility can be amplified if/when those flows reverse.
In summary, the Fed has shifted from being a tailwind to a potential headwind for markets: liquidity is tighter and rates are higher than the easy-money days of the 2010s. However, private liquidity from investors remains robust, as evidenced by record ETF flows and still high cash allocations finding their way into stocks. Going forward, a key question is whether continued QT and relatively high rates will eventually bite (e.g. straining credit markets or leading to earnings downturn) or if the ample private capital and still-growing economy can sustain the markets. Thus far, the “pain” from Fed tightening has been modest, but conditions in 2025 are certainly less accommodative than the prior decade. Market participants should monitor credit spreads, dollar liquidity, and fund flows closely – any stress in funding markets or reversal of ETF flows could signal a regime change in market liquidity.
Near-Term Market Outlook (Next Week)
Current Sentiment and Positioning: Market sentiment has recently swung toward fear and risk-off positioning. Various indicators show investors are quite pessimistic. The CNN “Fear & Greed” index, for example, is in “Extreme Fear” territory as of late March 2025certuity.com. The American Association of Individual Investors (AAII) survey likewise shows a strongly bearish bias (a negative bull-bear spread)certuity.com. Traders have been buying protective put options heavily – the CBOE put/call ratio spiked to high levels – reflecting hedging and a defensive stance. Volatility, as measured by the VIX, jumped sharply amid recent market turmoil (a rapid spike from previously calm levels)certuity.com. Although the VIX has pulled back slightly, it remains elevated, and the overall backdrop is one of nervousness. This cautious positioning can paradoxically be a contrarian positive sign (as Warren Buffett’s adage goes, be “greedy when others are fearful”)certuity.com. It suggests a lot of bad news may already be “priced in,” and any let-up in negative news could spark a relief rally given how defensively investors are set.
Macro risk factors: Several ongoing factors keep market participants on edge. Geopolitical and trade uncertainties have resurfaced – e.g. new tariffs or tech export restrictions – which are weighing on corporate confidencecertuity.com. Notably, the government’s recent “DeepSeek AI” regulatory actions rattled the big tech stocks that had led the marketcertuity.com. There is also concern about the trajectory of Fed policy: inflation has come down but remains somewhat “sticky” in certain areas, and wages are still rising, so there is anxiety that the Fed might hold rates higher for longer. While the consensus expects no immediate rate hike, the market is unsure about the timing of further rate cuts, especially with inflation fears lingeringcertuity.com. Additionally, the economy is sending mixed signals – manufacturing is soft, and leading indicators point to a possible mild recession later in 2025, yet the labor market is resilient. This murky outlook increases volatility, as traders react sharply to each new data point (jobs report, CPI release, etc.). Finally, the Q1 corporate earnings season is commencing. In the week ahead, several major companies (including some big banks and tech firms) will report results. Any surprises – good or bad – could swing the indexes given the fragile sentiment. Poor earnings or cautious outlooks could reinforce downside momentum, whereas solid reports might ignite a short-term rally by reassuring investors that fundamentals are intact.
Likely market direction next week: Taking all the above into account, the most probable scenario for the coming week is continued volatility with a downside bias, but with frequent sharp swings. In other words, a volatility spike and further downside cannot be ruled out. The market has not yet exhibited the kind of deep capitulation or “oversold extreme” that often marks a definitive bottomfidelity.com. During the recent 19% drawdown, technical indicators became moderately oversold but not at historic extremes, suggesting that equities could fall a bit further before attracting strong bargain-hunting interest. Macro risks (e.g. unresolved tariff issues and still-tight Fed policy) create a skew to the downside – investors may err on the side of caution, selling into any strength. However, given the already high fear levels and heavy hedging in place, any piece of good news or better-than-feared earnings could trigger a brief relief rally as short sellers cover positions. Such a rally might be short-lived unless it’s backed by genuinely positive catalysts, because the overarching concerns (inflation, Fed, geopolitics) would still loom. In essence, expect a choppy market: perhaps big intraday moves and alternating green/red days. A VIX in an elevated regime (~20s) would be consistent with that outcomecertuity.com.
On balance, further downside risk slightly outweighs upside for next week. The trend in place has been downward, and it often takes a clear flush-out or definitive positive trigger to reverse a correction of this magnitude. Neither may be present just yet. Positioning and sentiment, while extremely bearish (a potential contrarian buy signal), might need an actual catalyst to flip the script. Without one, the path of least resistance is lower. Therefore, markets are most likely to drift or slide lower overall in the coming week – perhaps testing new lows – accompanied by heightened volatility (large swings and a possible spike in the VIX if new risks emerge). Traders should be prepared for potential whipsaw movements. Until there is greater clarity on key macro questions (Fed policy direction, trade resolution, etc.), volatility will remain elevated and a decisive sustained rally appears unlikely. Instead, intermittent relief bounces could punctuate an otherwise cautious, risk-off tone. In summary, expect rocky trading ahead: the data-driven read is that the market’s next move will likely be a continuation of the recent volatility and weakness, rather than a full trend reversal to the upside, in the week immediately ahead. certuity.comcertuity.com
Sources: Key data and historical comparisons are drawn from U.S. Bureau of Labor Statistics reports and FRED database (labor force participation, employment by category, earnings)bls.govbls.govadvisorperspectives.com, official CPI vs. alternate calculations from FedSmith/ShadowStatsfedsmith.com, stock valuation metrics from Advisor Perspectives and market analystsadvisorperspectives.combeckcapitalmgmt.com, and Federal Reserve balance sheet and rate info from Fed releases and analysis (Wolf Street)wolfstreet.com. Market sentiment and positioning indicators are from recent surveys and articlescertuity.comcertuity.com. These objective data points underpin the analysis above, ensuring the conclusions are based on verifiable facts rather than opinion.
To clarify these are the thoughts of a computer “ChatGPT”, Garry Real Estate has not personally verified these facts. I basically asked it to sum up the current economic situation taking into consideration all of the changes that have been made to the metrics. I specifically sited Geroge bush reclassifying fast food workers as manufacturing jobs. I thought it was an interesting read and wanted to post it so that it can be reviewed in the future. I am in no way taking credit for the above article. If it holds true I will ask ChatGPT to provide an update from time to time and post it here as well.
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