Latest / The Macro Memo with Fexingo: Daily Conversations on Inflation, GDP, and Federal Reserve Policy / The May Jobs Report Preview What Markets Are Pricing Wrong
Transcript
- Lucas: So the May jobs report drops Friday morning, and there is a really interesting tension between what the headline numbers are likely to show and what the underlying data is already telling us about the health of the labor market. Luna: You're looking at the JOLTS surge from this week paired with the uptick in jobless claims, right? Lucas: Exactly. The JOLTS data for April came in at 7.62 million openings — that's up from 6.89 million in March, a pretty big jump. On the surface that looks like the labor market is tightening again, which normally would argue against rate cuts. But at the same time, initial jobless claims for the week ending May 30 hit 225,000, up from 212,000 the prior week. That's the highest level since early 2025. Luna: So openings are up but more people are filing for unemployment. That's contradictory — unless the composition of hiring is shifting. Lucas: That's exactly what I think is happening. And the ADP private payrolls report from Wednesday gives us a clue. They reported 122,000 jobs added in May, which was actually stronger than the consensus estimate. But the detail that matters is where those jobs came from. ADP showed that leisure and hospitality added 38,000, education and health services added 28,000 — these are lower-wage, often part-time or seasonal roles. Meanwhile, manufacturing added only 5,000, and professional and business services added just 2,000. Luna: So the growth is concentrated in sectors that tend to have higher turnover and less job security. Lucas: Right. And that's the disconnect that the Fed is grappling with. The Fed funds rate is currently at 3.62 percent, after those two quarter-point cuts earlier this year. The market is pricing in another cut at the July FOMC meeting. But if the jobs report on Friday shows a headline number like 180,000 or 200,000 — which is what economists are expecting — the narrative might shift back toward 'the labor market is still too hot to cut.' Luna: But the long-term unemployment numbers tell a different story. I saw the CNBC piece today — long-term unemployment is surging, and it has hidden costs. Lucas: That's the other piece of this. The unemployment rate has been flat at 4.3 percent for months now, but the duration of unemployment is creeping up. The share of unemployed workers who have been out of work for 27 weeks or more is rising. That's not captured in the headline rate. And historically, when long-term unemployment rises, it takes a much bigger stimulus — or a much lower rate — to bring those people back into the labor force. Luna: So the Fed sees a 4.3 percent unemployment rate and thinks they have room to hold a bit, but the actual slack in the labor market might be larger than that number suggests. Lucas: Precisely. And that's why I think the market is underpricing the probability of a July cut. The CME FedWatch tool is showing about a 60 percent chance of a quarter-point cut in July. I think that number should be higher, given the trajectory of long-term unemployment and the fact that core PCE is still at 3.3 percent but trending down. Luna: Let's talk about that core PCE number. It came in at 129.6 for April, up from 129.32 in March. That's month-over-month inflation running at about 0.2 percent annualized, which is actually pretty benign. Lucas: Exactly — the three-month annualized core PCE is probably running around 2.5 percent now, maybe a tick lower. That is well within the Fed's comfort zone if they believe inflation is sustainably moving toward 2 percent. And with the labor market showing these cracks beneath the surface, I think they have room to cut again in July. Luna: But the hawkish argument is that the JOLTS surge suggests labor demand is still too strong, and cutting too early could reignite wage inflation. Lucas: And that's a legitimate concern. But I'd push back with two points. First, the JOLTS number is notoriously noisy — the month-over-month swing of 731,000 openings is huge and might be partially statistical noise. The confidence interval on JOLTS is wide. Second, even with 7.6 million openings, the ratio of unemployed workers per opening is still around 1.2 to 1, which is not that tight by historical standards. In 2022, that ratio was below 1. Luna: So the headline JOLTS number might be a bit of a mirage. Lucas: I think so. And the real story is the quality of the labor market. The fact that average hourly earnings are up to $37.50 — that's a 4.1 percent year-over-year increase — but that's mostly in lower-wage sectors pulling up the average. In higher-wage professional services, wage growth is actually moderating. Luna: So the Fed is looking at a labor market that is bifurcated: strong on the surface, weaker underneath, with inflation that is gradually cooling. Lucas: That's the two-speed economy in a nutshell. And it's why the Fed is so cautious. They don't want to overreact to a noisy JOLTS number, but they also don't want to wait too long and let long-term unemployment become structural. Luna: Let's bring in the bond market. The ten-year Treasury yield is at 4.53 percent, up a bit on the week. The two-year is at 4.27 percent. That's an inverted yield curve, but barely — about 26 basis points inverted. Lucas: Right, the curve is steepening as the market prices in more cuts. The ten-year breakeven inflation rate is at 2.36 percent, down slightly from 2.38 percent. That tells me the bond market is not particularly worried about inflation reaccelerating. So the path of least resistance for the Fed is to cut rates further, especially if the jobs report Friday shows any weakness. Luna: What's your specific call for Friday's number? Nonfarm payrolls. Lucas: I think we see a number around 150,000 to 170,000. That would be a slowdown from the prior month, but still positive. The unemployment rate likely stays at 4.3 percent, but watch for the U-6 underemployment rate — that includes part-time workers who want full-time work. That number has been creeping up and could be a better signal of slack. Luna: And if we get 200,000-plus? Lucas: Then the July cut probability drops to maybe 40 percent, and you'll see a sell-off in bonds and a rally in the dollar. But if we get a miss — say, 120,000 or lower — then I think the July cut becomes almost certain, and the market might even start pricing in a third cut by year-end. Luna: It's a real hinge point for the macro narrative. Lucas: Absolutely. And if walking through the economy with us has made something click — whether it's understanding the JOLTS noise, the long-term unemployment risk, or the rate-cut calculus — then I'll share something quick. Luna: Yeah, a handful of listeners make this possible directly with a small monthly contribution at buy me a coffee dot com slash fexingo. No ads, no corporate sponsors — just the economics conversation we actually want to have. Lucas: It's a tiny group, really, but that support keeps us doing this every day. So if it's useful to you, consider joining them. Either way, we keep going. Luna: Alright. So back to Friday — what are you watching most closely in the household survey versus the establishment survey? Lucas: The household survey is the one that gives us the unemployment rate and the labor force participation rate. Participation has been stuck around 62.5 percent for months. If that ticks up — even if payrolls are solid — it could push the unemployment rate higher, because more people are entering the labor force looking for work. That would actually be a good thing for the economy, but it could spook markets that only look at the headline rate. Luna: So a rising unemployment rate could be interpreted as either a weakening economy or a strengthening labor supply. Context matters. Lucas: Exactly. And that's the kind of nuance that gets lost in the first five minutes after the release. By lunchtime, the market will have settled on a narrative, but the real story takes days to unpack. Luna: Well, we'll be back Monday to break down whatever the data shows. Lucas: We will. Until then, keep an eye on those jobless claims numbers — they might tell us more than the headline payrolls.