The labor market in the US is expected to show signs of further deterioration when Friday’s May NFP are reported. But, it’s still an open question of whether the data will be bad enough for the Fed to move towards cutting rates. A remarkably stable labor market has been one of the things that Fed Chair Jerome Powell has pointed to for why rates are being kept on hold.
The market keeps pushing forward its expectations for the first rate reduction of the year. Up until a week ago, it was penciled in for July. But, following strong US economic data in the interim, the market sees only a 20% chance of next month’s rate cut happening. Instead, the market is pricing in a 70% chance of easing in September. The markets also don’t see a second cut happening this year.
In a Holding Pattern
Analysts have noted the surprising resilience of the US labor market despite the turmoil from tariffs, and Q1 GDP going negative. But the labor market is a known lagging indicator, and will often see the effects of economic shifts last. The theory is that given the uncertainty, employers are opting to keep jobs open, waiting for more concrete data before starting significant layoffs.
This could mean that the jobs market is a bit of a ticking time bomb. If businesses suddenly were to lose hope that there will be an economic rebound soon, then a large increase in joblessness could follow. That might leave the Fed scrambling to lower rates in an effort to shore up the labor market. But, until that happens, the balance of forces seems to be keeping the Fed in wait-and-see mode
Cracks of Rays of Sunshine?
Tuesday’s release of the JOLTS report showed some interesting changes in the jobs market dynamics. The data was from April, which means an acceleration of the trends might be seen in the May data. Job openings actually increased in April, despite economists expecting them to drop. On the other hand, the number of voluntary quits decreased, hitting the lowest amount since the pandemic.
This is significant, because fewer people quitting is likely a sign that they are worried they won’t be able to get a better job. That could reduce the upward pressure on wages, and by extension the upward pressure on inflation. This would also contribute to a “loosening” of the labor market, something that the Fed is generally very concerned about. The average hourly wages figure could be an indicator of whether the jobs market is starting to decompress.
What to Look Out For
The consensus is that May NFP will come in at 130K jobs added, slower a slow down from the 177K reported in April. That would also be below the 152K average for the last twelve months, as well as the third consecutive drop in jobs creation. All of that could indicate a worrying pattern for policymakers.
The unemployment rate, on the other hand, is expected to stay unchanged at 4.2%. Meanwhile average hourly earnings are seen slowing to a 3.7% growth rate from 3.8%, which is still above the inflation rate. But a significant drop in this number could be a sign of that labor market loosening that was mentioned previously.
