Resilience in a Cooling Labor Market: Opportunities in Sectors Defying Economic Headwinds

The U.S. labor market is showing unexpected resilience amid signs of a slowing economy, with healthcare, leisure/hospitality, and state/local government sectors defying the headwinds of fiscal uncertainty and cooling demand. While broader economic indicators like manufacturing and federal employment have faltered, these three sectors are outperforming due to policy-driven demand, structural labor shortages, and demographic tailwinds. For investors, this divergence presents a compelling case to reallocate capital toward firms in these areas, which are proving to be defensive plays in an otherwise uneven recovery.

Healthcare: A Steady Anchor in an Unsteady Economy

The healthcare sector added 62,000 jobs in May—the fastest pace in over a year—surpassing its 12-month average of 44,000. Hospitals and ambulatory care services led the charge, reflecting sustained demand for medical services. This growth is not merely cyclical: it is structural. An aging population, federal mandates for expanded mental health and elderly care, and the lingering aftereffects of pandemic-era healthcare utilization have created a durable demand backdrop.

Even as the Federal Reserve's inflation-fighting efforts slow broader economic activity, healthcare remains largely insulated. Medicare and Medicaid funding, though under political scrutiny, remain sacrosanct in budget negotiations, while private insurers are raising premiums to offset rising costs. For investors, this stability favors firms like UnitedHealth Group (UNH) and Cigna (CI), which benefit from predictable revenue streams, and healthcare providers like Tenet Healthcare (THC) and Community Health Systems (CYH), which are expanding in underserved markets.

Leisure/Hospitality: Consumer Spending's Last Bastion

Leisure and hospitality added 48,000 jobs in May—more than double its recent monthly average—defying concerns about a spending slowdown. Food services and travel-related jobs drove the gains, as consumers continue to prioritize discretionary experiences over goods. This resilience is partly a function of pent-up demand from post-pandemic restrictions, but it also reflects a broader shift in consumer preferences. With wage growth steady at 3.9% year-over-year, households are prioritizing “experiential” spending even as inflation erodes purchasing power elsewhere.

The sector's labor shortages, exacerbated by retirements and low immigration, have pushed wages higher, but companies are responding with automation and premium pricing. Chains like Darden Restaurants (DRI) and Marriott International (MAR) are capitalizing on this trend, with Darden raising prices by 4% in Q1 2025 while maintaining traffic. Meanwhile, the JOLTS report's hiring rate of 3.5%—the highest since late 2024—suggests employers are confident enough to fill open roles, even if quits remain elevated.

Government Employment: Federal Cuts vs. State/Local Gains

While federal government employment fell by 22,000 in May, state and local governments added enough jobs to offset this decline, resulting in a net loss of just 1,000 for the sector overall. This divergence highlights a key theme: fiscal stimulus is shifting from federal programs to state/local initiatives. Infrastructure projects, education spending, and social assistance programs—backed by $1.2 trillion in federal infrastructure funding allocated since 2021—are sustaining jobs in construction, public education, and social services.

The Social Assistance sector, which includes childcare and eldercare services, added 16,000 jobs in May, fueled by demand for services that federal policies increasingly mandate (e.g., paid family leave, childcare subsidies). Investors should consider companies like Bright Horizons (BHABC), which manages corporate childcare centers, and infrastructure firms like Fluor Corporation (FLR), which benefit from state-funded projects.

Why This Matters for Investors

The labor market's sectoral divergence underscores a critical truth: not all industries are equally vulnerable to an economic slowdown. Healthcare and leisure/hospitality are demand-inelastic sectors, while state/local government jobs are anchored by long-term funding streams. In contrast, manufacturing and trade—sensitive to tariff policies and global demand—remain fragile.

For portfolios, this suggests three actionable strategies:
1. Overweight healthcare stocks, particularly insurers and providers with exposure to government programs.
2. Add leisure/hospitality firms with pricing power and strong brand equity to capitalize on resilient consumer spending.
3. Invest in state/local infrastructure contractors, which benefit from bipartisan spending priorities.

The Fed's pivot to a “data-dependent” rate policy and the recent moderation in wage growth (to 3.9% year-over-year) also reduce the risk of a sharp economic contraction. Yet even if a recession occurs, these sectors are likely to weather it better than others.

Risks and Considerations

No sector is recession-proof. Healthcare could face headwinds if Congress caps drug prices or reduces Medicare reimbursement rates. Leisure/hospitality may struggle if consumer confidence collapses, and state/local budgets could tighten if tax revenues decline. Investors should pair these bets with defensive plays in consumer staples and utilities.

Conclusion: Positioning for Resilience

The May jobs report reveals a labor market where select sectors are thriving despite broader economic fragility. Healthcare, leisure/hospitality, and state/local government employment are not just surviving—they are adapting and expanding. For investors seeking stability in an uncertain environment, these sectors offer a blend of defensive attributes and growth potential. As the economy navigates its next phase, capital reallocated to these areas may prove to be the safest bet.

Data sources: Bureau of Labor Statistics (BLS), Job Openings and Labor Turnover Survey (JOLTS), Federal Reserve Economic Data (FRED).