A red-hot labor market could be in the beginning stages of cooling down. What this means economically and politically could range from the good, the bad, to the ugly.
Labor-force participation numbers did not budge, average weekly hours slipped, and average hourly earnings slowed monthly and year over year.
Federal Reserve, Wall Street Happy Over Weak Jobs Data
Investors were ebullient over the news as the leading stock market indexes rallied as much as 1.8 percent at the opening bell.U.S. Treasury yields were drowning in a sea of red ink. The two-year yield shed more than 6 basis points, to around 4.81 percent. The benchmark 10-year yield declined close to 6 basis points, to below 4.52 percent.
Wall Street lifted its expectations that the Federal Reserve could cut interest rates twice this year, with the earliest one occurring at the policy meeting of the Federal Open Market Committee (FOMC) in September. While this is considerably down from the market’s forecast of six rate cuts heading into 2024, traders are more optimistic than they were before the updated snapshot of the employment situation.
“With Fed Chair Powell leaning dovish at Wednesday’s press conference this has breathed new life into Federal Reserve interest rate cut calls,” said James Knightley, the chief international economist at ING, in a note.
The futures market was penciling in a single rate reduction by the year’s end.
“Only 28 bps of rate cuts were priced for 2024 as a whole just ahead of Wednesday’s FOMC meeting,” Mr. Knightley added.
However, despite a weaker-than-expected April jobs report, experts contend that there will need to be additional weakness in the coming months for the central bank to pull the trigger on the first pivot.
“Summer rate cuts would require further weakening: Slower payrolls growth in April is not enough to provoke the Fed into any kind of imminent preemptive policy action, in our view,” said BNP Paribas in an analyst note. “However, to us it certainly corroborates the chair’s assessment that the U.S. economy does not need policy rates to go higher from the current level.”
After a turbulent first quarter of slower growth and higher inflation, traders will search for more clues to support a late-summer rate cut.
Earlier this week, after the central bank left rates unchanged at a 23-year high, Fed Chair Jerome Powell suggested that monetary policymakers would be ready to respond to “meaningful” weakness in the labor market.
“A couple of tenths in the unemployment rate would probably not do that, but it would be a broader thing that would suggest that it would be appropriate to consider cutting,” Mr. Powell told reporters.
According to the March Summary of Economic Projections (SEP), Fed officials predicted that the unemployment rate would rise to 4 percent this year and 4.1 percent in 2025.
A Cooling-Off Period
But while the labor market is not witnessing a collapse, economists and market watchers say the plethora of data points indicate conditions are slowing down.Job openings have eased to their lowest levels since February 2021, while companies have announced more than 322,000 job cuts this year.
Businesses are presently in a “wait-and-see posture,” says Andrew Crapuchettes, the CEO of RedBalloon.
“Small businesses are still absorbing the first quarter’s economic slow-down, and now they’re cautiously watching for signs of economic direction before placing their bets,” Mr. Crapuchettes said.
“We see this in the hiring space,” he added. “Employers aren’t hiring to expand, nor are they reducing staff. They are mostly filling existing openings in essential roles.”
The National Federation of Independent Business’ Small Business Optimism Index fell for the third consecutive month in March, and recorded its lowest reading since December 2012.
Businesses are facing various “economic headwinds” as inflation, particularly input and labor costs, are their chief concerns, according to Bill Dunkelberg, the organization’s chief economist.
“Inflation has once again been reported as the top business problem on Main Street, and the labor market has only eased slightly,” he said.
Whether modest softness in the labor market will be enough to encourage the Fed to pull the trigger on one or two rate cuts this year remains to be seen. As for the equities arena, “the bull market is intact,” says Nancy Tengler, the CEO and CIO of Laffer Tengler Investments.
‘Great American Comeback’ vs. ‘Horrible Job Numbers’
President Joe Biden touted the April jobs report and said the numbers reflect the continuing “great American comeback.”“When I took office, I inherited an economy on the brink, with the worst economic crisis in a century. I had a plan to turn our country around and build our economy from the middle out and the bottom up,” President Biden stated, adding that there is more work to do.
On the other hand, the latest employment data were “horrible,” said former President Donald Trump.
“Horrible job numbers just announced,” the presumptive Republican presidential nominee wrote on Truth Social. “A big miss from fake estimates. They should have asked me to give the forecast. Biden is destroying our country.”
Although the U.S. economy has experienced 27 consecutive months of an unemployment rate below 4 percent, a plethora of surveys depict struggling voters largely sour on the current economic landscape.
Despite the White House’s soft-landing declaration earlier this year, the pronouncement might have been too premature.
President Biden’s worst-case scenario could be occurring at the wrong time.
The latest Consumer Price Index (CPI) rose to a higher-than-expected 3.5 percent. The first-quarter GDP report showed the economy expanded just 1.6 percent.
Various reports confirm inflation is reaccelerating and the economy could be slowing.
Of course, economists still have two-quarters’ worth of data to sift through until the November election. Should the latest economic trends reverse, President Biden’s approval rating on the economy might not.
A recent Economist/YouGov survey showed 54 percent of respondents disapproved of the president’s handling of the economy. In addition, a Harvard-Harris poll revealed a 58 percent disapproval rating for President Biden’s record on the economy.
Since January 2021, the administration has been contending with kitchen table economics that has ventured in the wrong direction.
Cumulative inflation has risen 19 percent as everything, from electricity bills to food to gasoline, has rocketed. Real (inflation-adjusted) average hourly wage growth is down 2.7 percent since January 2021. Borrowing costs are through the roof as mortgage rates top 7 percent again and credit card interest rates hover near record highs. Housing affordability is crippling the current generation of homebuyers.
It might have been unsurprising for market observers and the punditry class to see The Conference Board’s Consumer Confidence Index weaken in April.
Moreover, a recent Gallup poll found that 42 percent of adults say economic conditions are “poor,” falling for the first time since October.
And the polls suggest many Americans are now looking back at the Trump presidency with great nostalgia.
An April CNN survey showed that 55 percent of respondents say they now view the former president’s time in the White House as a success.
This further supports other polling, such as a February FT-University of Michigan study, that shows more Americans trust the real estate billionaire mogul on the economy than President Biden.
Meanwhile, murmurs of stagflation—a blend of high inflation, stagnating growth, and rising joblessness—have gotten louder in recent weeks.
Even some of the top Wall Street names are concerned about repeating the 1970s.
“You should be worried about [stagflation],” JPMorgan Chase CEO Jamie Morgan told the Associated Press. “I’m just a little more dubious than others that a [soft landing] is a given.”
But while Main Street is fending off economic developments that impact their daily living standards, Wall Street is seeking to build on market gains this year.
