Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The May Jobs Report Numbers Markets Missed
Transcript
- Lucas: So the May jobs report landed on Friday, and the headline number — 159 million nonfarm payrolls — came in a bit above what forecasters expected. ADP had set the table with 122,000 private payrolls on Wednesday, which was stronger than anticipated. But the real story, the thing that makes this report more complicated than it looks, is what happened underneath the surface. Luna: You're talking about the long-term unemployment jump, right? The headline unemployment rate stayed flat at 4.3 percent, but the composition shifted. Lucas: Exactly. The headline 4.3 percent masks a pretty significant deterioration in the duration of unemployment. People who have been out of work for 27 weeks or longer — that number surged. And it's not a one-month blip. It's been climbing steadily. Last month we talked about that hidden cost for workers, but the May data confirms the trend is accelerating. Luna: So we're adding jobs — 172,000 net new positions in May — but we're also seeing a growing pool of people who can't find work for months at a time. That seems contradictory. Lucas: It is, unless you zoom in on which sectors are hiring and which are not. Healthcare and government continue to add. Construction is holding up. But retail, manufacturing, and parts of professional services — they're shedding. The people losing those jobs aren't the same people being hired into healthcare. There's a skills mismatch, and it's getting worse. Luna: And that mismatch shows up in the JOLTS data too. Job openings jumped back up to 7.6 million in April, up from about 6.9 million. But that's not necessarily a sign of strength. Lucas: Right. It's a sign that employers have openings they can't fill, while unemployed workers lack the specific skills or geographic access to take them. The Beveridge curve — the relationship between job vacancies and unemployment — has shifted outward. It used to be that 7.6 million openings with 4.3 percent unemployment would mean a very tight labor market. Now it means structural friction. Luna: How does the Fed read that? If the labor market is generating jobs but also creating a long-term unemployment problem, do they focus on the jobs number or the duration? Lucas: That's the million-dollar question. The Fed has been signaling one or two more rate cuts this year, assuming inflation continues to moderate. Core PCE is sticky at around 3.3 percent, but the trend is gently down. A jobs report that looks solid on the surface gives them cover to hold steady. But the long-term unemployment surge is the kind of data that historically precedes a more serious downturn. Luna: So you're saying the market might be underreacting to the duration data because the top-line payrolls number was okay? Lucas: Exactly. Markets rallied modestly Friday because the headline beat expectations. But if you look at the five-day moves — the S&P 500 is down 2.8 percent, the NASDAQ off 5.1 percent, the ten-year yield up to 4.54 percent — that's not a market that's comfortable. The bond market is pricing in higher long-term rates, which is usually a growth concern, not an inflation concern. Luna: And the yield curve is still inverted, but only slightly. The two-year is at 3.62 percent, the ten-year at 4.54 — that's a positive spread of nearly 90 basis points. That's actually a normal curve again. Lucas: It normalised earlier this year, but the level of rates is what's striking. 4.54 percent on the ten-year with core PCE at 3.3 percent and real GDP growth at 1.6 percent annualized — that's a pretty restrictive real rate. Historically, when the Fed funds rate at 3.62 percent is paired with long-term unemployment rising, the economy is usually heading toward recession within twelve to eighteen months. Luna: If walking through the economy with us has made something click — maybe it's the JOLTS surge, or the long-term unemployment trend — the way these episodes stay ad-free is listener support. It's a small thing, but it keeps us independent. Lucas: Yeah, it really does. And if today was useful to you, the simplest way to keep that going is buy me a coffee dot com slash fexingo. That's it. Luna: No pressure, just a nod if you get value from the show. Alright, back to the data. Lucas: So let's talk about what the long-term unemployment surge means for the average worker. The share of unemployed who have been out of work for over six months is now above 22 percent. That's up from about 18 percent a year ago. Historically, once that number passes 20 percent, the labor market has a hard time self-correcting. Luna: Because skills atrophy, networks shrink, and employers screen out long gaps on résumés. Lucas: Exactly. There's a scarring effect. The Congressional Budget Office has done work showing that workers who experience a spell of long-term unemployment earn 15 to 20 percent less for the rest of their careers. So this isn't just a statistic — it's a real drag on household income and consumer spending going forward. Luna: And that feeds into the inflation picture, too. If people are earning less, they spend less, which reduces pricing pressure. But higher unemployment also reduces bargaining power for wages. Average hourly earnings rose to $37.50, which is about 3.6 percent year-over-year — that's actually a deceleration from earlier in the year. Lucas: Good point. Wage growth is slowing, which the Fed will welcome. But it's slowing because of composition — lower-wage workers are being laid off, and higher-wage workers are holding jobs. The average goes up not because everyone got a raise, but because the bottom dropped out. That's the kind of nuance the headline misses. Luna: So what should we watch in the next few months? Initial jobless claims ticked up to 225,000, which is still low historically, but the trend is upward. And continuing claims have been creeping higher. Lucas: I'm watching the JOLTS quits rate. When workers are confident, they quit for better opportunities. The quits rate has been falling for over a year. If it stabilizes, that's one thing. If it keeps dropping, it means workers are hunkering down — and that's usually a lagging indicator of a softening economy. Luna: Also the next CPI print. If core services inflation ex-housing — the supercore measure — continues to moderate, the Fed might have room to cut even with the labor market as it is. Lucas: Right. The Fed is data-dependent, but they also have a dual mandate. If long-term unemployment keeps rising, they'll start to lean more on the employment side of that mandate. Chair Powell has been careful not to commit to a timeline, but the minutes from the last FOMC meeting showed some officials were already discussing the risks of waiting too long. Luna: So the May jobs report, at first glance, was a 'good enough' number. But underneath, it's a report that raises more questions than it answers. Lucas: That's the pattern we keep seeing. The economy is slowing, but gradually. The labor market is softening, but from a very strong position. Long-term unemployment is the smoke. Whether it turns into fire depends on whether the Fed misreads the signal. Luna: I guess we'll have a clearer picture after the next JOLTS release and the July jobs report. Lucas: Absolutely. And we'll be watching. Thanks for being here.