May jobs report: “Steady as she goes”

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Lauren Brice: Welcome to Research Recap on J.P. Morgan's Making Sense. I'm Lauren Brice, a member of the North America Rates Sales Team, and I'm joined by Mike Feroli, our Chief U.S. Economist, to walk us through implications for the employment report and what it means for the path ahead for the economy and for the Fed. Mike, thanks very much for joining.

Mike Feroli: Thanks for having me.

Lauren Brice: So today we received the May employment report, and it showed a mixed result with a small miss to the headline number and a decline in the participation rate, but a steady U-rate and strength in hourly earnings. What were your high-level takeaways?

Mike Feroli: So the jobs report was, overall, no big surprises. We had job growth that was pretty close to the average we've been seeing over the last year, 139,000. We did have some downward revisions to prior months, but that's kind of a regular pattern now. The unemployment rate was unchanged at 4.2% for the third straight month. We did have a little firmer average hourly earnings growth, increased four-tenths last month, though the year-ago measure unchanged at 3.9%, where it's been all year long. So big picture, it looks like steady as she goes, nothing changing too abruptly in terms of job growth, in terms of labor market slack, in terms of wage growth. So it seems like a report consistent with pretty modest but steady growth.

Lauren Brice: I mean as you said, payroll growth has averaged roughly 150,000 over the last few months, which is slightly stronger than the 12-month average. With that said, though, looking at the data this week, continuing claims are rising, ADP showed a sharp drop, and we're seeing meaningful revisions to the payroll numbers. How are you taking all these data points together when thinking about the underlying health of the labor market?

Mike Feroli: Yeah, so you know I guess there's a little point here that some of the jobless claims data came after the survey week for the May employment report, which is the week of the 12th. So that may reflect some timelier news. That being said, you don't want to put too much weight on one or two jobless claims reports. But overall, I think the picture, when we put it all together, looks like an employment market that is softening, but very, very gradually, and certainly not, we're not seeing any sort of nonlinear behavior yet in terms of the strength of the labor market.

Lauren Brice: And then thinking about employment growth, plenty of media attention on more stringent laws and blanket bans of some foreign citizens entering the U.S. altogether. Could you talk about your expectations, how immigration policy evolves from here?

Mike Feroli: Yeah, so I think the big thing about immigration is that the slowing in immigration that seems to be in some of the data we look at should imply a slowing in labor force growth, right? And that means over time, your break-even number of jobs needed per month to keep the unemployment rate stable is probably going from something that was like 200,000-ish over the past year or two to now around 100,000-ish, which it looks like it may already be kind of showing up in the data when you count not only for the revisions we saw today, but some data we got earlier in the week that suggests that overall job growth last year is gonna be revised down. So maybe the slowing in labor force and labor supply is already kind of showing up to some degree in the data, but I think that's really the main area we would expect to see slower a job growth, at least in these numbers.

Lauren Brice: Thanks, Mike. Let's turn to sentiment and to the consumer. So we've seen a notable rebound in sentiment, at least in some data points since the Liberation Day rout, though there are still some areas of concern. I guess one data point to mention being the decline in the quit rate suggesting perhaps lower levels of confidence. What's your read?

Mike Feroli: So we not only saw a decline in the quits rate in the JOLTS report, but in the employment report, we actually saw the number of job leavers also decline. So it does look like people are having less confidence in the strength of the labor market in terms of leaving jobs to find a better job. That said, I think what we're seeing that you referenced more recently is some improvement in very depressed sentiment after some of the better news on, or more benign news on trade. And certainly something you've seen in the Michigan survey has been that a lot of people have been referencing tariffs in their concerns about both the economy and inflation. So that certainly seems to be helping, as does lower gas prices. People always like lower gas prices. So I think that's showing up too in the sentiment numbers.

Lauren Brice: Top of mind for investors is the health of the consumer and I suppose the ability of the consumer to cushion the economy from negative growth impulses associated with incoming tariffs, which we'll talk more to later. The savings rate has come off the lows. Personal income versus spending data we received last week suggests a buffer and consumer cash power remains inflated. Curious, your take here.

Mike Feroli: Yeah, so as you mentioned, we had a good personal income report supported by more social security payments since the beginning of the year. And then adding to that, today's jobs report suggests that labor income growth has been running pretty firm, at least in the first couple months of the year. So you put it all together and consumer's income situation looks like it's doing well. And that's the most important driver of consumer spending. So I think right now there's no immediate threat to consumer spending. Of course, we are a little worried as we go out in the summer if we do see some of the tariff effects pass through into higher consumer prices, then that would limit the real spending power of that what looks like good nominal income gains.

Lauren Brice: I guess taking this all together and thinking about growth impulses, positive data flow we received in the last week or so via the PMIs, ISM and regional Fed surveys prompted us to lift our growth forecasts for the U.S. from 2% to 4% for the second quarter. Does this week's data and developments in trade talks pose much of a risk to your view?

Mike Feroli: So most of that upward revision to second quarter growth was a result of the trade data, which suggests that big decline in imports in the second quarter should mechanically help the second quarter GDP number. So it's basically a mirror image of the weakness we saw in the first quarter. When we strip away trade and inventories, growth in what we think the first and second quarter is gonna come between two and 2.5%. And I thought that the May employment report broadly consistent with a number like that, which is to say growth that's not too hot or not too cool, which is pretty much what we got again in the May jobs report.

Lauren Brice: Sure, and then I guess on that, there's been plenty of discussion around a strong first half of the year equates to quite a bit of a downturn. In the second half of the year, how much weight are you putting on that when you're thinking holistically about growth?

Mike Feroli: Yeah, so when we're thinking about the second half, obviously the big factor here is tariffs and how that may impact the economy. We do think that we start to see the tariffs pass through into consumer prices. Really in June, July, August, and that those higher prices then, as mentioned earlier, weigh on real consumer spending. But right now that's just a forecast. We have, as I said, the first half looks like pretty steady around two-ish, but we do think tariffs induce a step down in growth. That's our current thinking.

Lauren Brice: And then I guess on tariffs and how they feed into inflation, plenty of ink has been spilled on the contention in the Fed's dual mandate, though to date the inflation impact has been largely benign. How do you think the Fed, how long do you think they continue to wait patiently in terms of a labor market that's clearly cooling, inflation data is not looking too alarming, and then obviously we've got the pressure coming from the current administration, which we saw today as well.

Mike Feroli: Yeah, I think the Fed can be very patient here. Certainly the June meeting, I think they're just going to sit on their hands, and then we actually don't think they move until December. And I would also add, I don't think the administration pressure is going to really enter into their decision making, but I would think they want to have several months here to wait and see how the tariff effects are playing out. As you mentioned, it's a dilemma because it puts upward pressure on inflation and downward pressure on growth. And so that creates some challenges. And I think rather than try and judge which of those two forces is going to be more important, I think they're going to wait and see what plays out in the data because no one knows for sure. We don't, and they don't. So I think in that circumstance, it makes sense for them to wait. And as mentioned, we think they can wait until December.

Lauren Brice: So I guess final question from me, following on from talking about our expectations for the Fed through the end of the year, as of just after the jobs report, we have 45 bps of cuts through 2025. So nearly two full cuts priced in. I know you said there's not much we're expecting from the June print, but anything in the statement or the press that could prompt a change to your thinking?

Mike Feroli: No, I think for the next few weeks, our thinking probably is going to be more influenced by what we see in the CPI report rather than what we hear from the Fed. I think from the Fed, very little reason for them to make big changes relative to what they said last month. I think they're going to follow the data just like the rest of us. And I would be really surprised if they said anything notable at the June FOMC meeting.

Lauren Brice: That feels like a good place to close. Mike, thank you so much for joining and for sharing your thoughts with us.

Mike Feroli: Thanks for having me.

Lauren Brice: And to our listeners, thank you for tuning in and we hope you join us again next time.

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