Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / How Rising Labor Force Participation Reshapes the Job Market
Transcript
- Lucas: So the unemployment rate has been stuck at 4.3 percent for months now, and most of the coverage I've seen treats that as a static number — like, nothing's changing. But when you dig into the details, something interesting is happening underneath. Luna: You're talking about the labor force participation rate, aren't you? Lucas: Exactly. The participation rate has been quietly ticking up — it's now around 62.7 percent, which is still below pre-pandemic levels, but it's moving in the right direction. And that's actually a pretty big deal. Luna: Because more people entering the workforce means the same unemployment rate can coexist with a lot more hiring, right? Lucas: Right. Think about it this way: we added about 172,000 nonfarm payrolls in the latest month, bringing the total to just over 159 million jobs. But the unemployment rate didn't budge. That's possible because the labor force grew by roughly the same amount — more people started looking for work. Luna: So the headline number is hiding a healthier dynamic than most people assume. Lucas: Yeah, and it matters for how we read the whole picture. The JOLTS data just came out for April — job openings jumped to 7.6 million, up from about 6.9 million the month before. That's a pretty sharp increase. Luna: That is a big jump. So employers are still hungry for workers, and now more people are stepping in to fill those roles. Lucas: Right. And average hourly earnings rose to $37.50 — up three percent year-over-year, which is right in that Goldilocks zone where wages are growing faster than inflation but not so fast that it forces the Fed's hand. Luna: Let's talk about the Fed angle, because this seems like exactly the kind of data that influences their thinking. Core PCE just hit 3.4 percent again, which is sticky. But if participation is rising and wage growth is moderate, that should ease some of their concerns about a wage-price spiral. Lucas: It should, but the Fed is data-dependent, and they've made it clear they need to see sustained progress on inflation. The fed funds rate is still at 3.63 percent, and the market is pricing in maybe one cut by year-end. Luna: But if participation keeps rising and the labor market stays tight without overheating, doesn't that argue for a softer landing? Lucas: That's the bull case. More workers means more supply capacity in the economy, which can help cool price pressures over time without destroying demand. And we're seeing it in real GDP growth — the latest annualized figure was 2.1 percent, up from just 0.5 percent the previous quarter. That's a meaningful acceleration. Luna: So the economy is growing, hiring is solid, and more people are coming off the sidelines. That doesn't sound like a recession script. Lucas: No, it doesn't. But there are risks. The yield curve is still inverted — the 10-year Treasury is at 4.37 percent while the 2-year is at 4.14 percent. That's been flashing a recession signal for over a year now. Luna: Though an inverted yield curve has been a reliable recession indicator, but it's also been wrong before, or at least premature. Lucas: Exactly. The curve inverted in late 2022, and we're still here. Some economists argue that the post-pandemic economy is different — that quantitative easing and the massive fiscal stimulus changed the relationship. But you can't ignore it entirely. Luna: So what's your take? Is the participation uptick enough to shift the narrative? Lucas: I think it's one of the most underappreciated stories right now. If participation continues to rise, it could allow the economy to grow faster without triggering inflation. That would give the Fed room to cut rates sooner rather than later. Luna: But if participation stalls — say, because of long COVID or early retirement becoming permanent — then we're back to a labor shortage, wage pressure, and the Fed stays on hold. Lucas: Right. And that's the key variable. The prime-age participation rate for 25-to-54-year-olds is actually above pre-pandemic levels — that's the good news. The gap is mostly among older workers and younger people who are still in school or training. Luna: So the pool of potential workers isn't unlimited, but there's still some slack. Lucas: Yeah. And you know, this kind of granular analysis is exactly why we do this show every day. We try to look past the headlines and find the real signal. If you've gotten something out of these conversations, a couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if that feels right to you. Luna: It really does make a difference, keeps us ad-free and independent. Lucas: So back to the data — the other thing I'm watching is the breakeven inflation rate. The 10-year breakeven is at 2.22 percent, which is actually down from where it was a few months ago. That tells me bond traders are betting inflation will moderate over time. Luna: Which aligns with the participation story — more workers, less wage pressure, lower inflation expectations. Lucas: Exactly. And if that holds, then the economy might be in a sweet spot where growth is solid, inflation is slowly coming down, and the labor market is absorbing new entrants without breaking a sweat. Luna: But there's always a 'but' — what's the biggest risk to that scenario? Lucas: External shocks. The headlines this week about China widening export curbs and the Strait of Hormuz situation remind us that supply chain disruptions can reignite inflation quickly. The Fed can't control geopolitics. Luna: And those are exactly the kinds of things that show up in inflation data with a lag. So even if the participation story is bullish, you can't ignore the tail risks. Lucas: Right. And that's why the Fed is being so cautious. They'd rather hold rates steady and risk missing a soft landing than cut too soon and let inflation reaccelerate. Luna: So the next few months of participation data are going to be critical. If the trend continues, it could really shift the debate. Lucas: Absolutely. I'll be watching the next jobs report closely — not just the headline payrolls number, but the participation rate and the underlying flows. That's where the real story is. Luna: And we'll be here to break it down. Thanks for listening — we'll see you next time. Lucas: Take care, everyone.