Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The Jobs Report That Has Everything and Nothing
Transcript
- Lucas: So the April jobs report dropped this morning, and it is one of those numbers that tells a clean story on the surface and a much messier one underneath. Luna: Payrolls jumped more than expected, right? That's what the headline says. But I saw the consumer sentiment number also hit a fresh record low today. Lucas: Exactly. Nonfarm payrolls came in at a gain of roughly 215,000 for April, above the consensus of about 190,000. But the unemployment rate stayed stuck at 4.3 percent, and that's the third month in a row at that level. Luna: So we're adding jobs, but the unemployment rate isn't budging. That implies the labor force is growing about as fast as hiring. Lucas: Right, labor force participation ticked up a bit, which is actually healthy. More people coming off the sidelines and finding work. But here's the red flag: average hourly earnings rose only 0.2 percent month over month. That's the smallest gain in over a year. Luna: Wage growth cooling. That's good for the inflation fight, but not great for workers who are still dealing with higher prices. Lucas: And that's the tension. The consumer sentiment survey from the University of Michigan this morning showed a drop to 67.4, the lowest since June 2022. People are feeling the squeeze even as the labor market adds jobs. Luna: Right, because inflation may be coming down, but prices aren't. The CPI data we got for March showed the index at 330.3, up from 327.5 in February. That's still a 3.4 percent year-over-year increase. Lucas: And core CPI, excluding food and energy, is even stickier at 3.7 percent. Meanwhile, the ten-year Treasury yield has dropped to 4.36 percent this week, down about eight basis points from last Friday. Luna: So the bond market is rallying on the jobs report? That seems counterintuitive. Strong jobs usually mean higher yields. Lucas: Typically, yes. But the market is reading this report as weak enough to keep the Fed on hold, and maybe even open the door to a cut later this year. The two-year yield is down to 4.01 percent, which is a bigger move than the long end. Luna: So the market is pricing in rate cuts even though the Fed keeps saying they need more evidence that inflation is sustainably moving toward 2 percent. Lucas: Right. And the Fed's preferred inflation gauge, core PCE, is running at 2.8 percent year over year as of March. That's down from its peak, but it's still well above target. And the ten-year breakeven inflation rate is at 2.45 percent, which suggests the market expects inflation to stay above 2 percent for the next decade. Luna: So we have this weird mix: a strong headline jobs number, but underlying weakness in wages and consumer confidence. The bond market is signaling lower growth ahead, not higher inflation. Lucas: That's exactly the conundrum. And then there's the JOLTS data from March, which showed job openings falling to 6.87 million, down from 6.92 million in February. That's the lowest level since early 2021. Luna: So the labor market is cooling, but not collapsing. And initial jobless claims ticked up to 200,000 last week, from 190,000 the week before. Still low by historical standards, but moving in the wrong direction. Lucas: Look, the Fed is in a bind. They want to cut rates to support the economy, but they can't because inflation is still too high. And the jobs report doesn't give them a clear signal either way. It's not strong enough to force a hike, but not weak enough to justify a cut. Luna: Paul Tudor Jones said this week there's 'no chance' that Kevin Warsh, or anyone, will be able to get the Fed to cut rates anytime soon. And the CNBC headline today says the Fed is 'quickly running out of reasons to cut rates.' So the market might be pricing in cuts that won't happen. Lucas: Exactly. The Fed funds rate is at 3.64 percent, and the market is pricing in about two quarter-point cuts by December. But if the economy keeps adding 200,000 jobs a month and inflation stays above 3 percent, the Fed won't have cover to cut. Luna: So what do you make of the sector breakdown? I saw that manufacturing added jobs, which is a bright spot given the weakness we've seen in that sector over the past two years. Lucas: Manufacturing added about 12,000 jobs in April, after several months of essentially flat or negative prints. That's encouraging, but it's a tiny fraction of overall payroll growth. Leisure and hospitality added 50,000, government added 40,000, and health care added 60,000. So the gains are concentrated in a few sectors. Luna: And those are the sectors that have been driving job growth for the last couple of years. So it's not exactly a broadening of the labor market. Lucas: No, it's not. And the household survey, which is used to calculate the unemployment rate, actually showed a decline in employment of about 50,000. The payroll survey is based on employer reports, and the household survey is based on people. They've been diverging lately. Luna: That divergence often happens around turning points in the economy. If the household survey is to be believed, the labor market is weaker than the payroll number suggests. Lucas: Right. And then you factor in the record low consumer sentiment, the pullback in job openings, and the rise in initial claims, and you start to see a picture of an economy that is losing momentum. But the GDP data from Q1 showed real GDP growth at 2 percent annualized, up from 0.5 percent in Q4 last year. So the economy is still growing. Luna: That's the strangest part. The economy is growing, the labor market is adding jobs, but consumers feel terrible. What explains that disconnect? Lucas: Inflation expectations. The University of Michigan survey showed that one-year inflation expectations rose to 3.5 percent in May, up from 3.2 percent in April. And five-year expectations edged up to 3.1 percent. People are seeing higher gas prices, higher food prices, and they're worried it's going to get worse. Luna: And the fact that wage growth is slowing means they're not getting ahead. They're falling behind. Lucas: Exactly. Real average hourly earnings are probably flat to slightly negative when you adjust for inflation. So even though people have jobs, they're not feeling any richer. And that's why consumer sentiment is in the dumps. Luna: So where does that leave the Fed? They have a meeting in June, and then again in July. Are they going to move? Lucas: I think they hold steady through the summer. The next two CPI reports will be crucial. If we see core inflation tick down to 3 percent or below, the Fed might start signaling a cut in September. But if inflation stays sticky, they'll stay on hold. Luna: And the bond market seems to be betting on the former. The ten-year yield at 4.36 percent is well below the 4.7 percent we saw in April. That's a big move. Lucas: It is. And the rally in bonds is partly a flight to safety on the consumer sentiment data, but also a repricing of growth expectations. The market is starting to believe that the economy is slowing enough to warrant lower rates, even if the Fed isn't there yet. Luna: So it's a classic tug of war between the data and the market's interpretation of that data. And right now, the market is leaning dovish. Lucas: Yeah, and I think the risk is that the market gets ahead of itself. If the next jobs report is similarly strong, the narrative could flip again very quickly. Luna: One thing I keep coming back to is the JOLTS data. Job openings are down to 6.9 million, and the ratio of openings to unemployed workers is about 1.2. That's down from over 2.0 at the peak. So the labor market is clearly normalizing. Lucas: It is. But it's normalizing to a level that is still historically tight. The unemployment rate at 4.3 percent is still low. So the Fed can afford to be patient. They don't need to rush. Luna: Patience seems to be the word of the day. But the market is impatient, and consumer sentiment is deteriorating. Something has to give eventually. Lucas: Something will. Either inflation comes down and the Fed cuts, or the economy weakens enough that the Fed cuts to support it. Either way, the next few months are going to be critical. Luna: So the April jobs report gave us a lot of data, but not a lot of clarity. It's a report that has everything and nothing. Lucas: That's a good way to put it. The data is ambiguous, and the market is struggling to interpret it. I think the real question is whether the consumer starts to change their behavior. If they start pulling back on spending, then the economy will slow, and the Fed will have a reason to cut. Luna: And the consumer sentiment data suggests they're already feeling the pinch. We'll see if that translates into real spending data in the coming months. Lucas: Right. And we have retail sales data for April coming out next week. That will be a key indicator to watch. If consumer spending softens, the case for a rate cut gets stronger. Luna: So the takeaway from today's episode is that the jobs report is not a game-changer. It's a mixed bag that keeps the Fed on hold and leaves the market guessing. Lucas: Exactly. We're in a wait and see period. The data is going to come in, and the Fed will react. But for now, the economy is in a strange place: growing, but not thriving. Adding jobs, but not making people feel better. It's a paradox that defines 2026 so far. Luna: Well, thanks for walking through the numbers. I feel like I have a much clearer picture of where we stand. Lucas: Happy to. It's a confusing moment, but that's what makes it interesting. We'll be watching the data closely and we'll bring you the analysis as it develops. Luna: Sounds good. Until next time.