Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / What the May Jobs Report Will Reveal About the Labor Market
Transcript
- Lucas: So tomorrow is the May jobs report, and I think there's a specific tension in the data that not enough people are talking about. Luna: The JOLTS surge, right? Job openings jumped to over 7.6 million in April. That's a big swing from the 6.9 million we saw in March. Lucas: Exactly. That's a huge rebound. And at the same time, long-term unemployment is rising. We covered that a couple episodes back, but it's still climbing. So you have this weird picture where companies are posting more jobs, but people who've been out of work for a while are having a harder time getting back in. Luna: It's like the market is healing in some places and scabbing over in others. If today's conversation helps make sense of that, you know what keeps these shows ad-free — it's listener support at buy me a coffee dot com slash fexingo. Lucas: And honestly, if you get value from walking through this stuff with us, that link is the engine that keeps it running. So, back to the data — the ADP private payrolls number came in at 122,000 for May, which was actually a bit stronger than expected. Luna: But that's still below the 12-month average, right? Hiring is slowing. Lucas: Right. The average over the last year has been around 180,000 per month. So 122,000 is a deceleration. And when you layer that on top of the JOLTS spike, it suggests employers are posting more openings but not necessarily filling them quickly. Luna: Which could mean they're being pickier, or they can't find the right skills. Lucas: Or both. And that's where the long-term unemployment piece gets interesting. The number of people unemployed for 27 weeks or more has been creeping up. The unemployment rate itself is still 4.3 percent, but the composition of that unemployed pool is shifting toward people who've been out of work longer. Luna: So the headline unemployment rate might look stable, but underneath it, the labor market is getting stickier. Lucas: Exactly. And that's the kind of thing the Fed pays attention to. If long-term unemployment keeps rising, it can weigh on wage growth and consumer spending down the road. But the JOLTS data complicates the story. Luna: Because more openings usually means more demand for labor, which should push wages up. But if the people who need jobs aren't the ones being hired, you get this mismatch. Lucas: That's the skill mismatch hypothesis. And the Fed is in a tough spot. The fed funds rate is at 3.62 percent, and they've been signaling they want to cut, but core inflation is still sticky — core PCE at 3.3 percent. If the labor market looks too hot, they hold off. If it looks too cold, they cut. Luna: But the JOLTS spike makes it look hot, while the long-term unemployment makes it look cold. So which signal wins? Lucas: I think the market is leaning toward the hot signal for now. The ten-year yield has been creeping up — it's at 4.54 percent as of today, up about 1.4 percent over the last five days. That suggests bond traders are pricing in less chance of a cut. Luna: But if tomorrow's payrolls number comes in weak, that could flip the narrative pretty fast. Lucas: Absolutely. The consensus is for around 180,000 new jobs, but I've seen estimates ranging from 150,000 to 220,000. If we get something below 150,000, I think you'll see yields drop and rate-cut expectations jump. Luna: And if it's above 200,000? Lucas: Then the JOLTS spike looks more like a genuine recovery in labor demand, and the Fed stays on hold. But I want to focus on one number that I think is more important than the headline: average hourly earnings. It's at $37.50 as of the last reading, up a bit. If wage growth accelerates, that's a problem for the inflation hawks. Luna: Because wages feed into services inflation, which is the part the Fed cares about most. Lucas: Right. So tomorrow we're watching three things: the headline payroll number, the unemployment rate, and average hourly earnings. The long-term unemployment data comes out with a lag, but we already know that trend is worsening. Luna: And initial jobless claims ticked up to 225,000 last week, from 212,000. That's not a huge jump, but it's a direction. Lucas: It's consistent with a labor market that's softening at the margins. The four-week moving average is still low, but the uptick is worth noting. So the picture is mixed, and the Fed has to decide which part of the picture to believe. Luna: I think they'll wait for more data. They've been cautious all year. Lucas: I agree. The Fed is data-dependent, and with the JOLTS spike and the sticky core inflation, they have cover to hold. But if long-term unemployment continues to rise, that could become a political problem too. Luna: It's already getting attention. There was a CNBC piece this week about the hidden costs of long-term unemployment. Lucas: Right. And those costs are real — skill erosion, lower future earnings, mental health impacts. The economy doesn't just need a low unemployment rate; it needs a healthy labor market where people can transition between jobs smoothly. Luna: So where does that leave us for tomorrow? What's your base case? Lucas: My base case is payrolls around 170,000, unemployment staying at 4.3 percent, and wages up 0.3 percent month over month. That's a Goldilocks number — not too hot, not too cold. But the range of outcomes is wider than usual because of the conflicting signals. Luna: And if we get a big miss one way or the other? Lucas: Then the market reaction will be sharp. I think a weak number would actually be more interesting because it would force a reassessment of the JOLTS spike. Are those openings real, or are they just companies posting jobs they can't fill? Luna: That's a good question. We'll find out tomorrow morning. Lucas: We will. And no matter what the number is, the underlying story about long-term unemployment and the skills mismatch isn't going away. That's the structural issue that monetary policy can't solve on its own. Luna: So the jobs report is one piece of a bigger puzzle. Lucas: Exactly. And we'll be back tomorrow to break it down as soon as the data drops.