2023 has been a turbulent year for the broad market, from rising inflation and higher for longer interest rates to sweltering mortgage rates. The labor market has managed to stage a comeback in a year of resiliency with quit rates and layoffs easing back to pre-COVID levels.

Deutsche Bank Senior US Economist Brett Ryan joins Yahoo Finance to give insight into the labor market, lessons he learned from a surprising fiscal year, and what the labor market could look like heading into 2024.

"The strength of the labor market, to this point, was really surprising... and especially labor hoarding and one of the ways to think about it is you have the quits rate, which is back to pre-COVID, you had the hiring rate, which is slightly below pre-COVID, but the layoffs and discharges rate, that's the standout here, and that's still at its lowest point in history really," Ryan says.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video Transcript

- I thought it was interesting in your note that you really did go back and say, what happened in 2023? I'm really curious, and I've been asking a lot of folks this, what lessons you learned from that exercise and from a year that really didn't turn out like a lot of people expected.

BRETT RYAN: Sure. I think one of the things that was underappreciated was that, and that was a surprise, was really what happened with tax receipts and fiscal policy. You had a bracket creep that resulted in large tax payments in 2022, that reversed in 2023. So people had less withholding that resulted in weakness in consumer spending in the first half of the year, but a bit of a comeback in Q3.

You also had the employee retention credit that was unexpected. And those are the couple of things. But really the labor market, the strength of the labor market to this point was really surprising, I think, and especially labor hoarding. And one of the ways to think about it is, you've had, you have the quits rate, which is back to pre-Covid.

You have the hiring rate, which is slightly below pre-Covid. But the layoffs and discharges rate, that's the standout here. And that's still at its lowest point in history really. If you were back to the 2019 layoffs and discharges rate, we'd be close to printing flat payrolls at this point and possibly negative.

- And so just sticking with the labor market. And so I'm just curious what you see for the labor market in 2024. I mean, there's been signs of cooling. Do you see further deterioration there?

BRETT RYAN: Yeah. So to date, through October 70% of the job gains have been in just two sectors, and that's in private sector job gains. And that's leisure, hospitality, and health care and social assistance. Those are the two sectors that not surprisingly, we're still trying to get back to their pre-Covid trend. But other sectors of the economy the rest of the job market looks less strong.

And the diffusion index for payrolls is now towards the lows of the last cycle. We continue to see a slowdown going forward. And that's really driven by a slowdown in consumer spending beginning in this quarter. So you had a really strong Q3 that was surprising. Some of the high frequency data points to a slow, a sharp slowdown recently. We think that will continue into Q1 and Q2. And again, that labor hoarding scenario can only last for so long without a demand upturn and demand coming back.