Jobs, tariffs and the Fed: Recapping the March US employment report 

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Mike Feroli: You know, tariffs are obviously the big news this week. Clearly a big development, whether it will bring jobs back. I think most economists are a little bit skeptical that it will have a significant impact on manufacturing employment.

Lauren Brice: Welcome to Research Recap on J.P. Morgan's Making Sense. I'm Lauren Brice, and I'm joined by Mike Foley, our chief U.S. economist. We're here today to talk about the takeaways from the March U.S. employment report, as well as the path ahead for the economy and for the Fed. Mike, thanks so much for joining us.

Mike Feroli: Thanks for having me.

Lauren Brice: So today's print is an important gauge of, you know, overall economic health amidst a high period of uncertainty and volatility on the trade policy front. What were your key takeaways or the highlights for you?

Mike Feroli: Yeah. So overall it was a favorable jobs report. Most notably the headline numbers surprised to the upside. We had 228,000 jobs created last month, which was about 70,000 or so more than expected. We did have some downward revisions of prior months – so that kind of, tarnished maybe the message just a little bit. And then outside of that, no major surprises. So we had an unemployment rate that barely rounded up, to 4.2%, which is still low. We had average hourly earnings, which increased another 3/10 of a percent, as it has been for many months now, which is kind of, you know, a sweet spot of decent wage growth without being too inflationary. And you had a stable workweek. So overall, the picture was one of a pretty good picture, right? One of continued healthy labor demand growth, alongside wage inflation developments that are not too scary.

Lauren Brice: Great. And thinking about trend growth, how are we thinking about, you know, the decrease in immigration growth? The impact on the labor market and then the overall strength of the economy?

Mike Feroli: Yeah. So we believe that immigration policies which are currently being implemented will probably slow the trend in monthly job growth in coming months, relative to what it was over the past three or so years by about 100,000 per month. So in kind of very, rough ballpark figures, we think trend growth in the labor force was about 200,000 per month. We think that's downshifting to around 100,000 per month. Now that being said, when we're going to see that, I think is, difficult to say. I don't think we can say with precision it's going to be this month or that month, or even this or that quarter, but that's where we expect the trend to settle over time.

Lauren Brice: Sure. And, you know, we've been discussing at length the divide between hard data versus sentiment data, where the former is held up so far, where the latter has taken quite a sharp turn. How do you think about this divergence when you're forecasting labor market growth, pace of hiring, etc.?

Mike Feroli: Yeah, it really is a bit of a dilemma here. We saw something similar in 2022, which I think is one reason why maybe we're not jumping on all the survey data, as telling us the economy's about to roll over because, in that period, you also had something similar, which is a big deterioration in sentiment data. That said, I think we're seeing perhaps even a sharper and quicker deterioration, particularly as it relates to business sentiment. So that does make us a little concerned. Maybe not so much about job growth, you know, next month, but I think some of the signals we're seeing about, capital spending intentions are a little worrisome. And that is factoring a little bit into how we’re forecasting and CapEx out in coming quarters.

Lauren Brice: And now turning to everybody's favorite topic of tariffs.

Mike Feroli: Yes.

Lauren Brice: Whilst, you know, very fluid, what is your opinion on whether implementation of tariffs in their current form, can bring jobs back into the U.S.?

Mike Feroli: Yeah. So I guess first what I'd say. You know, tariffs are obviously the big news this week. The news this morning on the jobs report was for the week of March 12th. And so in some respects this is old news. And maybe that's why the market kind of looked past it. Now, in terms of what we saw this week, clearly a big development, whether it will bring jobs back – I think most economists are a little bit skeptical that it will have a significant impact on manufacturing employment, for at least two reasons. One, it's likely that much of the decline in manufacturing employment we've seen over the past several decades has been related to productivity growth, which is generally stronger in manufacturing than in services. And second, when we talk to industrial companies, what we hear from them is that, you know, it takes several years to plan and get a factory up and running. And in those several years, the policy regime can change again. So we're not really hearing much in the way of new capacity being added in light of what we've, seen recently in trade policy.

Lauren Brice: Sure. And then, I guess top of mind for investors is who will wear the cost of the high prices brought about by tariffs? Be it hit to profit margins or, you know, passed on to the consumer. What are your initial thoughts here? An you know, how should we think about this in terms of the impacts to hiring?

Mike Feroli: Right. And it's top of mind for economists too. Let me just say one of the lessons from the 2018-19 trade war was that a lot of the tariff costs were passed through to domestic importers. Right. So historically, you had seen sometimes the foreign supplier might reduce prices to help offset the tariffs and keep market share. That didn't really happen in 18-19. And instead, you saw some of the split between domestic producers, retailers and so forth, and domestic consumers. And we expect in this environment in which, you know, overall, the labor market is still pretty tight, that ultimately probably much of the other cost will be passed on to domestic households. So we do expect that inflation will move up in coming months. And we expect the effect to be we don't think we're going to have to wait long to see it. We think we could see some of it as soon as April and May.

Lauren Brice: We heard from Powell a little earlier today. The Fed is clearly in an incredibly tough spot. At the minute, trying to balance inflation impulses versus, you know, the negative growth impulses as a result of these tariffs. What are your thoughts on how the fed is going to balance these impulses? And what will they prioritize when thinking about setting policy over the next few months?

Mike Feroli: So you're right, it's a classic dilemma for a central bank to find itself in. I think the message we heard from Powell today, as well as all the other governors this week, is that in this environment, with particularly with inflation expectations generally running a little on the high side, that it pays for them to wait – and wait in a position where they believe they're already modestly restrictive. So hopefully keeping some downward pressure on inflation expectations. And so I think, you know, what you heard today from Powell, should push back on some of the, you know, the market chatter that perhaps the fed will step in here. We're even hearing some people talk about intermittent cuts. I think what Powell told you today was they're going to take their time and assess things. And I think they'll probably need to see a lot more evidence of growth deterioration rather than just a forecast of growth deterioration before they act. But we do expect that eventually when they do move, the next move will be lowering rates. I think the question is how long they're willing to wait to really see the pain in the labor market before making that first move.

Lauren Brice: Sure. I guess that feeds into my next question around – we have a month until the next meeting in May, and what sort of data you might be watching for when the fed might be looking for that could prompt a move to the policy right by then. As of this morning, we were pricing in just shy of 50% of a cut in that meeting. It's obviously moved a lot, in the last few days, so I'd be curious your thoughts there?

Mike Feroli: Yeah, I think to get to May you'll need to see some pretty significant deterioration in the data, particularly since we only have one jobs report between now and that meeting. And then on the activity side, I'm sure they'll be watching jobless claims, but jobless claims are an imperfect indicator of job growth. So I think you really need to see some convincing deterioration that looks pretty dramatic to actually get them cutting in May. And I don't think equity market weakness alone is going to be enough. I think they really need to see the labor market worsen significantly.

Lauren Brice: Got it. Well, that feels like a good place to close here. Thank you so much for joining and for sharing your thoughts with us, Mike. I look forward to,chatting with you again next month.

Mike Feroli: Thanks, me too. 

Lauren Brice: And to our listeners, thank you so much for tuning in to this episode of Research Recap on J.P. Morgan's Making Sense podcast. We hope you join us again next time.

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