Alexa Hanelin: Welcome to Research Recap on J.P. Morgan's Making Sense podcast. I'm Alexa Hanelin, a member of the North America Rate Sales team here at J.P. Morgan. And I'm joined by Mick Feroli, our chief U.S. economist. Today we received the April employment report. And it showed a labor market in pretty good shape. Mike, walk me through what stood out to you in the report.

Mike Feroli: I guess what stood out was that there weren't any big surprises. Certainly there have been a lot of concerns about growth. We've seen that in a lot of surveys. Instead, what we got was a number that was-- the headline was better than expectations. 177,000. Probably beat expectations by about 50,000. Now, you did have net downward revisions to prior months at a little over 50,000. So the message overall on job growth is pretty in line with expectations. But that's good. Pretty solid performance in the most recent month, a little better than the 12 month average. So overall a pretty benign picture in spite of a lot of the concerns out there right now.

Alexa Hanelin: Let's take a look under the hood. The labor force participation rate went up while unemployment rate held steady. What do you make of the labor force growth in light of DOGE and immigration policy changes?

Mike Feroli: Yeah. So the participation rate has been bouncing around. It moved up last month. It's still a little bit off the recent highs. So I don't make too much out of that. DOGE, I think you see that a little more probably in the federal employment numbers, where you had another 10,000 decline in federal jobs last month. Immigration is going to be the hardest one here to really tease out from the numbers, in part because the numbers which are broken out by demographics in the household survey, those only get re-benchmarked to new estimates of foreign born population on a fairly infrequent basis. So we shouldn't at a first order, expect to be able to kind of tease that out in the number we get every month.

Alexa Hanelin: Thanks for that, Mike. And in terms of the job gains concentration. Anything under the hood that looked particularly interesting in light of trade and tariff policies?

Mike Feroli: Yeah. So, arguably I think one thing you're seeing is some stronger than usual growth in some of the distributive services like transportation and warehousing, which would be consistent with some of the evidence we're seeing that you have front loading of imports ahead of the tariffs. So that may be one factor supporting not only the jobs number, but also the average work week as well. Arguably we had a bit of a modest decline in manufacturing, which might also be consistent with what you would expect given some higher input prices. But also that would be hard just to distinguish from the normal month to month noise. So, I think though perhaps the transportation and warehousing and wholesale trade, that also looks like something that may be benefiting here from front loading activity, which presumably will, you know, roll over in coming months.

Alexa Hanelin: Yeah, on that front-loading activity that you mentioned, Mike. We’ve just started to get the hard-data sets for April, since Liberation Day, and they’ve been quite robust. Take first quarter GDP, some of the manufacturing data, is there anything here that is altering your view to the upside, that the economy is stronger than we anticipated, and more immune to tariffs?

Mike Feroli: Yeah, not in a big way. First quarter GDP was very noisy. And a lot of the moving components. You know, we've seen a lot of concerning surveys, but you know, as you mentioned, this week we got our first pieces of April hard data, not only the employment report, but auto sales. I would be surprised if we were to see a big effect this soon. Keep in mind that the April employment report covers the week which contains the 12th of the month. So that would be a pretty quick on/off switch if the economy were to respond that quickly to tariff news at the beginning of the month. So we still expect that over time the economy will slow into the second half, but we are looking for, actually okay growth in the second quarter. And I think what we're seeing today is consistent with that.

Alexa Hanelin: Smooth sailing for now. Let's take a step back and talk about the Fed. We're in blackout through the FOMC announcement on May 7th. After this week's data slate, the Fed should have no issue staying on hold for the near term. Market pricing is now closer to our forecast, which is 75 basis points for the year, three cuts starting in September. What would you need to see, Mike, to bring this call forward?

Mike Feroli: Yeah. So I guess one thing I would say is after this morning's report, the path to a June-ease is even narrower, right? You really need to see the activity data and particularly labor market data really fall off a cliff here. And that is really only one jobs report between now and the June meeting. So I think the path to June gets narrower. July, you have two jobs report. So, I still think a relatively narrow path, but one can envisage a scenario in which, if in the May report, you see the unemployment rate move up, jobs move down, and that's compounded in the June report, perhaps you get to July. But otherwise we're comfortable with the September start.

Alexa Hanelin: And are you paying any mind to the Fed independence story, given some pressure from the administration for the Fed to move more quickly on recuts?

Mike Feroli: I mean, we're paying mind to it in the sense of we're watching it carefully. I'm pretty confident that, the pressures will not sway Chair Powell or his committee from focusing on the employment and inflation trade off, which is probably going to be pretty challenging in and of itself over the next couple of months even without taking account of the political noise.

Alexa Hanelin: Yeah. Thanks, Mike. Let’s shift our focus to tariffs, this report suggests that despite businesses facing heightened uncertainty and turmoil, they really did not change their hiring processes that much. How are you thinking about services versus manufacturing jobs in the short and medium term here?.

Mike Feroli: Yeah, sure. So on manufacturing, at least in principle, you can think of two conflicting forces here. One is that manufacturers which use imported inputs, are going to suffer. But some manufacturers should benefit from reduced competition from abroad. It would seem that at least from the manufacturing surveys, the net is more negative than positive. So we would expect that, you know, the very modest decline in manufacturing employment we saw, this month, in April, we could see that further out into the year as well. On distributor services, we probably are getting some benefit right now. We would expect that to fade as the front-loading activity fades further on in the second quarter, services more broadly, like manufacturing the survey evidence, which suggests that the outlook is to the downside in terms of employment growth over the remainder of the year.

Alexa Hanelin: And business sentiment has definitely been impaired, as have consumer sentiment surveys. But consumers are still strong. Card data has been robust. Employment is staying firm. It's possible to timing lag. But if nothing changes, do you anticipate the margins to compress or for the consumers to bear the brunt of some of these price increases?

Mike Feroli: So, I guess we're not surprised consumers holding in here, in part because the job market holding in. Right? And I think after the April employment report, it looks like over the past three months, nominal labor income probably growing at around a five, 5.5% annualized pace, which against inflation running closer to two and a half, you know, gives you a pretty nice margin of real income gains. So, as long as the labor market holds in, we would expect the consumer to hold in. However, two things I would say is, one, we're expecting the labor market to soften as that caution you're seeing in business surveys is translated into weaker job growth. And the second thing is, as some of those higher tariff costs are passed along and higher prices, higher inflation means lower real incomes and lower real consumer spending. So, we think that's more of a story for later in the second quarter and on into the second half of the year.

Alexa Hanelin: Yeah, you mention the second half of the year. Good time to shift to our recession probability calls. So we have a 60% change of mild recession call for the second half of this year. Do you ascribe to the view that the longer the U.S. economy holds up, the deeper the recession will be once the labor market eventually does roll over?

Mike Feroli: Not necessarily. As I said, I don't think things here should necessarily flip on like a switch. Right? So we do expect over time the gradual weight of higher tariffs will weigh on the economy, particularly as some of the front-loaded inventories get dwindled down over the course of the year. So right now we're still feeling like around the risk of a mild recession. You know, there's an upside here that we could muddle through. A downside that you got something, more severe. But certainly nothing we're seeing recently has caused us to move our views in a big way.

Alexa Hanelin: And as we think about the second half of this year, we will get some fiscal stimulus, we will get some positive impulses for growth. How are we thinking about fiscal policy, tax cuts, TCJA, in light of what we've seen so far in this administration?

Mike Feroli: I mean, from my perspective, probably the easiest thing to say is that TCJA, the 2017 Trump tax cuts will get extended after their scheduled expiration at the end of the year. I think it's likely we get some added tax cuts on top of that, whether it's related to tips, Social Security, overtime income. I'm not sure that we'll necessarily see it in this calendar year. We may, if Congress moves quick enough. If that happens, then you would get a little bit of net additional, fiscal support, perhaps in the second half of this year, but more likely, early next year.

Alexa Hanelin: Got it. So in the near term we're focused on FOMC. We're focused on the continued hard data that we're receiving. And we're forecasting the fiscal stimulus to manifest in the second half of this year.

Mike Feroli: Yep

Alexa Hanelin: Well, that feels like a good place to close here. Thank you so much for joining and sharing your insights with us, Mike. Looking forward to hearing your thoughts as the markets evolve. And to our listeners, thank you so much for tuning in to this week's episode of Research Recap on J.P. Morgan's Making Sense podcast. We hope you join us again next time.

Mike Feroli: Thanks.

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