Deutsche Bank analysts report a breakdown in the traditional relationship between U.S. economic growth and hiring. The historically strong correlation that existed before COVID-19 has faltered, creating a divergence where growth remains solid while hiring stays weak.

From 2002 to 2019, the correlation between hiring and economic activity stood at 84%, according to analysts including Matthew Luzzetti and Brett Ryan. This persistent separation has led the Federal Reserve to cut rates multiple times to support a labor market, even as inflation remained above the central bank's 2% target.

The Fed recently kept rates on hold at 3.5% to 3.75%, with no anticipated policy changes until later this year. Deutsche Bank analysts see the resolution of this divergence as a critical determinant of Fed outlook, with rate cuts unlikely until inflation clearly returns to target if hiring strengthens.

The economic disconnect has also contributed to negative household sentiment about the wider economy. The analysts predict the outcome could influence midterm elections, with improving sentiment potentially benefiting Republicans, while continued weakness might favor Democratic chances as the Fed considers further rate cuts.

Quick Fact: Pre-pandemic correlation between U.S. hiring and growth was 84%.