Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What the Fed Reads Into the May Jobs Number
Transcript
- Lucas: Tomorrow morning the Bureau of Labor Statistics drops the May jobs report. And there is one number in that release that I think the Fed is watching more closely than the headline payrolls figure. Luna: Let me guess—it's not the unemployment rate either, is it? Lucas: It is not. The unemployment rate has been hovering around 3.6 percent for months, and it's not telling us anything new. What is telling us something new is the share of people who have been out of work for 27 weeks or longer—what economists call long-term unemployment. Luna: And that number has been creeping up, right? I saw a CNBC piece earlier this week that said it's surging, with hidden costs for workers and the economy. Lucas: Exactly. The latest data from April showed about 1.5 million long-term unemployed, which is still well below the pandemic peak of 4 million. But the trend is moving in the wrong direction. And the Fed cares about this because long-term unemployment is sticky. It doesn't resolve with a rate cut or two. Luna: Sticky how? Once people are out of work for that long, they tend to lose skills, lose connections, and it becomes harder to re-enter the labor force. The Fed would see that as a structural problem, not a cyclical one. Lucas: Right. And structural problems don't respond to monetary policy the same way. If the Fed cuts rates to stimulate hiring, but the long-term unemployed aren't getting those jobs because employers view them as less attractive candidates, then you've just inflated asset prices without fixing the labor market. Luna: So what's the Fed's alternative? Sit on its hands? Lucas: Potentially, yes—at least for now. The fed funds rate is at 3.63 percent, which is still restrictive. And the ten-year yield is at 4.54 percent, up 1.4 percent in just the last five days. The bond market is doing some of the Fed's work for it. If Friday's payroll number comes in at, say, 180,000 or 200,000—solid but not booming—the Fed could easily hold steady and wait for more data. Luna: And there's the ADP number from Wednesday: private payrolls grew by 122,000 in May, which was actually stronger than expected. So the economy is still adding jobs, but at a slower pace than last year. Lucas: Right. The three-month average for ADP is now around 130,000, down from about 200,000 a year ago. That deceleration is exactly what the Fed wants to see—a cooling labor market that doesn't spiral into a recession. But the composition matters more than the average. If those 122,000 jobs are concentrated in low-wage services and part-time work, that's a different signal than if they're in high-productivity sectors. Luna: And full-time jobs have been growing slower than part-time for a few months now. I think the Bureau of Labor Statistics data from April showed that part-time employment was up about 300,000 year-over-year, while full-time was essentially flat. Lucas: That's the kind of detail the Fed's research staff pores over. Because a rise in part-time work for economic reasons—people who want full-time but can only find part-time—is a sign of labor market slack that the headline unemployment rate misses. The U-6 measure, which includes discouraged workers and involuntary part-timers, is still around 7 percent, down from its peak but not moving much lately. Luna: So if the Fed is watching long-term unemployment, part-time numbers, and labor force participation, what would it take for them to actually cut rates this year? Because the market is pricing in maybe one cut by December. Lucas: I think they need to see a sustained drop in core inflation—core PCE is still at 2.8 percent, well above the 2 percent target—and some evidence that long-term unemployment is not becoming a permanent fixture. If the May jobs report shows another uptick in the long-term unemployed share, that might actually make the Fed more cautious about cutting, because they don't want to stimulate an economy where the benefits of that stimulus bypass the people who need it most. Luna: That's a fascinating paradox: bad news on long-term unemployment could actually delay rate cuts rather than accelerate them. Lucas: Exactly. And that's why I think the Fed's next move depends less on the headline payroll number and more on the composition of who is getting hired and who is getting left behind. If you're listening to this and thinking about the economy in a more nuanced way—well, that's kind of what we do here every day. And we do it without ads, by the way. Luna: Yeah, no commercials, no sponsors. Just two people trying to make sense of economic data. If that's something you find valuable, there's a simple way to support it. Lucas: Buy me a coffee dot com slash fexingo. That's it. No tiers, no perks, just a way to keep this independent and ad-free. Luna: And it really does make a difference. So thank you if you've ever chipped in. Lucas: Alright, back to the data. Let's talk about what the bond market is telling us, because the ten-year yield at 4.54 percent is sending its own message about inflation expectations and growth. Luna: And the two-year yield is at 4.28 percent, which is actually up 2.2 percent over the last five days. So the short end is rising faster than the long end—the yield curve is steepening, but from a deeply inverted position. Lucas: Right. The inversion has been with us for over two years now, which is historically unprecedented. Normally an inverted yield curve predicts a recession within 12 to 18 months. But here we are, with the economy still growing, still adding jobs, and the Fed still holding rates at a restrictive level. Luna: Some economists argue that the inversion signal has been distorted by quantitative tightening and the sheer amount of Treasury issuance. Maybe it's not as reliable as it used to be. Lucas: That's a fair point. But the fact that long-term yields are rising now—even as short-term rates stay flat—suggests the market is pricing in higher term premiums. Investors want more compensation for holding long-dated bonds because they see more uncertainty around inflation, fiscal policy, and geopolitical risk. Luna: And that brings us back to the Fed. If the ten-year yield rises on its own, that tightens financial conditions without the Fed having to do anything. So the Fed can afford to be patient. Lucas: Exactly. Chair Powell has said repeatedly that the Fed is data-dependent, not calendar-dependent. And the data right now is sending mixed signals: inflation is still above target, the labor market is cooling but not collapsing, and long-term unemployment is a slow-moving worry. The May jobs report tomorrow will be one more data point. But it's the trend, not the level, that will determine the next move. Luna: So what specific number will you be looking for in the release? Not the headline. Lucas: I'll be looking at the number of people unemployed for 27 weeks or more. If that ticks up again—say, above 1.6 million—that's a yellow flag. And I'll also watch the prime-age labor force participation rate, especially for women, because that has been a bright spot. If that starts to dip, it could signal that the labor market is softening beneath the surface. Luna: Good. I'll be watching the same. And I think a lot of our listeners will too. Lucas: We'll come back on Monday to break down the numbers. Until then, keep your eyes on the composition, not just the count.