Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the Fed Is Watching in the May Jobs Report
Transcript
- Lucas: Friday brings the May jobs report, and the setup is actually more interesting than the headline number might suggest. Luna: Because we already got the ADP private payrolls number on Wednesday — 122,000 jobs added, which came in a bit stronger than expected. Lucas: Right. Economists were looking for something closer to 100,000, so 122,000 is a solid beat. But the composition matters more than the total. ADP showed services-providing industries added 115,000 of those jobs. Goods-producing? Only about 7,000. So it's a services-led recovery continuing, but the pace is clearly down from the 200,000-plus prints we saw in late last year. Luna: If today was actually useful to you, the way these stay ad-free is listener support — buy me a coffee dot com slash fexingo. Lucas: Yeah, honestly, if this kind of breakdown helps you make sense of the numbers, that's exactly why we do this. So if you're finding value, buy me a coffee dot com slash fexingo — genuinely helps keep the lights on and the episodes free. Luna: Now, back to the jobs data — the ADP number has a spotty track record predicting the official payrolls figure, but it does give us a directional read. Lucas: Exactly. And what it's telling us is that the labor market is still adding jobs, but the engine is shifting. The pandemic-era boom in goods demand is over — now it's services, which tend to be more interest-rate sensitive. Think hospitality, healthcare, business services. Those are the sectors that carried April and May. Luna: So what does the Fed see in that? Powell has been pretty clear that the jobs market needs to cool for inflation to come down sustainably. Lucas: He has. And the key metric they watch is wage growth, not just job creation. Average hourly earnings in April were up 3.9 percent year-over-year. That's still above what most Fed officials consider consistent with 2 percent inflation — they want something closer to 3 or 3.5 percent. If the May report shows wages accelerating again, that's a problem. Luna: But if job creation slows and wages stay sticky, that's a different kind of headache — stagflation-lite. Lucas: Right. And that's the tension right now. The New York Fed's latest Survey of Consumer Expectations, released Monday, showed households' year-ahead inflation expectations held at 3.0 percent, but their expectations for income growth actually ticked down. People are feeling squeezed. Luna: The same survey showed financial worries hitting the highest level since July 2022. So consumers are anxious about their finances, but they're still getting jobs and getting wage increases — it's a weird disconnect. Lucas: It is. And for the Fed, that anxiety is actually a factor. If households pull back on spending because they're worried, that slows the economy and helps bring inflation down without the Fed having to raise rates further. So in a strange way, rising consumer anxiety could be a reason for the Fed to stay on hold. Luna: But spending data hasn't shown a pullback yet. Real personal consumption expenditures were still positive in April, up 0.2 percent. So the anxiety hasn't translated to behavior — at least not broadly. Lucas: Which means the Fed can't assume it will. They need to see the data move. And that brings us back to Friday's report. The consensus estimate for nonfarm payrolls is around 180,000. If we get something significantly below that — say, under 100,000 — that might start to change the conversation. But if it's inline or above, the Fed stays patient. Luna: The unemployment rate is expected to hold at 3.9 percent. That's still historically low. So it's not like the labor market is cracking. Lucas: No, it's not. But the trend is slowing. The three-month average of payroll gains has been declining since January. We were at 250,000 in January, then 200,000 in February, 180,000 in March, and April came in at 175,000. If May is 180,000, that's basically flat. If it's lower, the trend is clearly decelerating. Luna: And deceleration is what the Fed wants — as long as it's gradual. They've said repeatedly they don't want to see a sharp spike in unemployment. Lucas: Right. They want a soft landing. And the data so far this year has been pointing in that direction. But the wildcard is the tariff situation. The U.S. proposed fresh tariffs on 60 economies last week over forced labor trade practices. That could feed into import prices and eventually consumer prices, which would complicate the inflation picture. Luna: So even if the jobs report comes in soft, the Fed might not be able to cut rates if tariff-driven inflation is lurking. Lucas: Exactly. And that's the bind. The market is pricing in about two quarter-point cuts by year-end. But the Fed's dot plot from March showed only one cut. We'll get an updated dot plot at the June 17-18 FOMC meeting, and Friday's jobs report is the last major data point before that meeting. Luna: So this report really matters. It could shift the narrative going into the meeting. Lucas: Absolutely. If the jobs number is weak and wages are tame, the doves on the committee will have more ammunition to argue for a cut. If it's strong and wages are hot, the hawks will dig in. Either way, the range of outcomes is wide. Luna: And we haven't even talked about the participation rate. That's been stuck around 62.4 percent for months. If it ticks up, that could keep wage growth in check even if job creation is decent. Lucas: Good point. The participation rate is key because it determines how much slack is in the labor market. If more people come back into the workforce, employers don't have to bid up wages as much. The prime-age participation rate — 25 to 54 — is actually back to pre-pandemic levels, so the slack is mostly among older workers who retired early and haven't returned. Luna: Which is a structural issue, not something the Fed can fix with interest rates. Lucas: Exactly. And that's why the Fed focuses on the things they can influence — demand. If they see demand pulling back enough to bring wage growth down, they'll be satisfied. But if demand stays strong and supply constraints — like tariffs — keep pushing prices up, they'll have to stay tighter for longer. Luna: So what are you watching for specifically on Friday? Beyond the headline. Lucas: Three things. One: average hourly earnings month-over-month. The consensus is 0.3 percent. If it's 0.4 or higher, that's a red flag for the Fed. Two: the unemployment rate — if it ticks up to 4.0 percent, that signals more slack than expected. Three: the diffusion index, which measures how many industries are hiring. If it's broad-based, the labor market is still robust. If it's narrow, the soft spots are spreading. Luna: And what about the household survey versus the establishment survey? They've been diverging recently. Lucas: They have. The household survey, which is used to calculate the unemployment rate, has been weaker than the establishment survey. That's partly because the household survey captures self-employed and gig workers, which the establishment survey misses. If that divergence continues, it could mean the official payrolls number is overstating job growth. Luna: So there's a lot to unpack. And we'll get the data early Friday morning. Lucas: We will. And we'll be back to break it down as soon as the numbers hit. But for now, the key takeaway is: the labor market is slowing, but it's not broken. And the Fed is watching every line item closely. Luna: For anyone trying to understand where rates are headed, this Friday is a big piece of the puzzle. Lucas: It really is. And if you want to follow along with the data yourself, the Bureau of Labor Statistics releases it at 8:30 AM Eastern. We'll have our take on the next episode. Luna: Looking forward to it. Lucas: Same. Until then, keep an eye on those wage numbers.