Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / What Falling Jobless Claims Tell the Fed About Hiring
Transcript
- Lucas: So initial jobless claims just dropped to 226,000 — that's down from 230,000 last week. It's a low number, and on its face it tells you layoffs are basically nonexistent. Luna: But then you look at the JOLTS data from April and job openings jumped to 7.6 million — up from 6.9 million. That's a huge swing. Lucas: Right — the labor market looks incredibly tight from the demand side. Employers are posting more jobs than they have in months. But here's the thing: hiring isn't keeping pace. Nonfarm payrolls rose only modestly, and the unemployment rate is stuck at 4.3 percent. Luna: So there's this weird disconnect: lots of openings, few layoffs, but hiring is sluggish. Why aren't employers filling those positions? Lucas: That's the million-dollar question. One theory is a mismatch between skills and locations. We saw that headline last week about Nevada — 'Struggling to find a job? Try looking in Nevada.' Some states are booming, others are not. But I think there's something deeper. Luna: What's that? Lucas: Employers may be posting jobs as a kind of insurance policy. They're worried that if they don't have a pipeline of candidates, they'll be caught short when demand picks up. But they're not actually hiring because they're uncertain about the economic outlook. Growth is slowing — real GDP grew at just 1.6 percent annualized in Q1. They're hesitant to commit to new hires. Luna: That makes sense. The Fed has kept rates at 3.63 percent, and with core CPI still running at 3.1 percent, inflation is sticky. Businesses don't know if the next move is a cut or a hike. So they hedge by advertising jobs they might not fill. Lucas: Exactly. And the bond market is sending a contradictory signal. The ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — is at 2.25 percent. That's actually down a tick from last week. So bond investors think inflation is heading lower, which would give the Fed room to cut. But the labor market data suggests otherwise. Luna: The Fed's new chairman, Kevin Warsh, just had his first meeting. The headlines said there were five big takeaways. What's your read on where he stands? Lucas: Well, Warsh is known as a hawk — he's worried about inflation staying too high. But with the breakeven dropping and growth slowing, he's in a tough spot. The market is pricing in rate cuts, but if job openings stay elevated and wage growth ticks up — average hourly earnings are at $37.50, up from $37.41 — then he might hold steady. Luna: So we've got this standoff: the bond market says inflation will cool, but the labor market says employers are still desperate for workers. Who's right? Lucas: I think both are partially right. Inflation will likely moderate as rent and shelter costs ease — those lag by about a year. But the labor market is structurally tighter than pre-pandemic. The prime-age labor force participation rate is still below where it was in 2019. Boomers retired early, immigration was restricted for years, and childcare disruptions still keep some people on the sidelines. Luna: So the puzzle might not be a temporary blip. It could be a new normal — more vacancies, but slower hiring. That changes how the Fed should react. Lucas: Exactly. If it's structural, the Fed can't just cut rates to boost hiring. Lower rates might just push inflation up without closing the gap. The old playbook of 'tight labor market equals wage inflation equals Fed hikes' might not apply if the unemployment rate is stable at 4.3 percent and wage growth is only 2.4 percent year-over-year. Luna: That's a pretty modest wage gain, actually. Given inflation around 3 percent, real wages are barely positive. Lucas: Right. So workers aren't gaining much ground. And that feeds into consumer spending, which is the main driver of GDP. If real wages are stagnant, spending can't grow as fast. The Q1 GDP number of 1.6 percent growth reflects that. Luna: So the labor market is sending this confusing signal: lots of openings, but not much actual hiring or wage pressure. It's like the engine is revving but the car isn't moving. Lucas: Great analogy. And it leaves the Fed in a holding pattern. They don't want to cut prematurely and reignite inflation. But they don't want to keep rates high if the economy is actually weaker than the jobs data suggests. Luna: Speaking of things that are weaker than they appear — if you're one of the people who finds value in these conversations, that's actually what keeps us going. A couple of bucks a month — the price of a coffee — genuinely makes a difference. It's at buy me a coffee dot com slash fexingo. Lucas: Yeah, we don't run ads, so listener support is what makes this possible. Small contributions add up and keep the show ad-free and independent. Luna: Alright, back to the data. So if the labor market is structurally tight but not overheating, what should we watch for in the next few months? Lucas: I'm watching two things. First, the JOLTS quits rate — that's workers voluntarily leaving jobs. If it rises, that signals confidence and could push wages higher. Second, the weekly jobless claims trend. If claims stay below 230,000, the labor market is still resilient. But if they spike above 250,000, that's a red flag. Luna: And what about the Fed's next meeting? The market is pricing in a cut by September, but Warsh hinted at patience. Lucas: Right. I think they'll hold through the summer unless something breaks. The next CPI and PCE readings will be crucial. If core PCE — which is at 129.6, up from 129.32 — keeps rising month over month, cuts are off the table. If it flattens, the door opens. Luna: So we're in a wait and see period. The data is noisy, but the trend is clear: the job market is in a new equilibrium, and the Fed is trying to figure out what that means for inflation. Lucas: Exactly. And the key takeaway for listeners is this: don't read too much into any single data point. The drop in jobless claims sounds great, but paired with the jump in openings and stagnant hiring, it tells a more complicated story. The economy is transitioning, not collapsing. Luna: And as always, we'll keep tracking it. Thanks for listening. Lucas: Catch you next time.