Research Recap | April Jobs Report
Phoebe White: Welcome to Research Recap on J.P. Morgan's Making Sense podcast Channel. I'm Phoebe White, head of U.S. Inflation Strategy at J.P. Morgan. And today, I'm joined by my colleague, Mike Farrell, chief U.S. economist. And we're here to discuss takeaways from the April U.S. employment report, as well as the path ahead for the economy and the Fed. Mike, thanks so much for joining.
Mike Feroli: Glad to be here.
Phoebe White: So, Mike, last month we sat here talking about a report that seemed to be uniformly positive. And now we have a report where things were generally weak across the board. So what are your high level takeaways?
Mike Feroli: Well, I should say weaker. They were weaker, right? So this was still a good report. It was softer than anticipated and softer than the recent trends. But that's kind of what we and others had been hoping for, because while the labor market, as Chair Powell would put it, has been coming into better balance, it's not totally in balance.
Mike Feroli: It still looked a little hot. So I think all the cooling signs we saw today were welcome.
Phoebe White: Right. And I guess you look at sort of three month and six month run rates on payrolls, both at 242,000. The diffusion index ticks up to 60.4.
Mike Feroli: Diffusion index is still in a kind of a normal territory, but the job growth did moderate. Some of that was in a good chunk of it was in government. But in private sector, you also saw some moderation, job growth. I think it's also important that the the average workweek, which, you know, as always, second fiddle to job growth, but it's still pretty important.
Mike Feroli: Average workweek did come down. So I think overall, you're seeing you know, moderation and broad measures of business labor demand.
Phoebe White: Okay. So let's talk about that trend and sort of where we're headed. Last week, you revised up your GDP growth forecasts from one and a half to two and a half percent. How do you think we're tracking for second quarter growth?
Mike Feroli: So I think we're tracking well. So I think even with the moderation we saw today in both hours worked an average hourly earnings. It still looks like nominal labor income is growing somewhere around 5%, which should be enough to support. Still, you know, good consumer spending gains. And the consumer really has been the bulwark of the economy here.
Mike Feroli: So I still feel pretty good with obviously early in the quarter in terms of data, but we still feel pretty good with the number in that ballpark.
Phoebe White: And in terms of potential sort of conflicting signals from different data reports, I mean, it seems like generally we had been seeing some signs of weakening across other data. We got jolts this week, openings keeps coming down, you know, the ISM services numbers. But I think what's interesting is claims have been stuck at such a low level. Is there something different about this cycle or do you think we will be seeing claims to be higher if things keep weakening?
Mike Feroli: You know, it's interesting, you mentioned the JOLTS report, because within that report, what you see is that layoffs, which should correlate to some degree with claims, have also remained low, but that gross hiring has slowed. So I think what you're seeing is that businesses, while they aren't laying people off, they're just less enthusiastic about adding to headcount right now.
Mike Feroli: And I think that's starting to show through a little bit in the net number of hires. I guess, you know, another conflicting signal is earlier this week you got a strong ECI, whereas now with particularly with the revisions, average hourly earnings are looking softer. You know, and I think that's just one of those things par for the course, which is you're going to get some conflicting signals here and it's probably best to kind of average all of these when thinking about where wage growth is going.
Phoebe White: So do you think even post revisions that bounce in first quarters, sort of a bump on this road to normalization? I mean, we also, I guess, got stronger unit labor cost data. So where do you think we're headed on the wage front?
Mike Feroli: You know, it does look like we're still moderating. And again, I think the signal from, you know, average hourly earnings again the year ago now is down to 3.9%. Three three month annualized also looks pretty pretty soft. And then we had last week a softer signal on median usual weekly earnings in the first quarter. So when I kind of average all those things together, I think I think wages do look like they're still moderating.
Phoebe White: Okay. So let's talk about how the Fed is viewing inflation and maybe the risks to the outlook here. So at the meeting this week, we got some marginally hawkish changes to the statement and Powell's prepared remarks. But generally in the Q&A, he sounded pretty optimistic that inflation will be stepping down over the course of the year or so.
Phoebe White: Is there anything that surprised you from the Fed this week?
Mike Feroli: Not in a huge way, But I you know, I think you kind of alluded to the fact that the committee documents, which are the statement and to some degree probably the prepared remarks were more hawkish than the way Powell sounded. And Powell definitely while those prepared remarks, for example, took out the mention of rates being at their peak for the cycle.
Mike Feroli : Powell definitely leaned against the idea pretty hard that the Fed is contemplating hiking anytime soon.
Phoebe White: Right? So instead, he laid out these potential passes, either holding off on rate cuts if inflation is the upside or beginning to cut, if we get that progress on inflation or if we get unexpected weakening in labor market. So which of those paths do you think is most likely?
Mike Feroli: I would think eventually. Well.
Phoebe White: I guess for the second half of the year, as he.
Mike Feroli: So well I guess, you know, to to cut to the punch line where we're still looking for our first piece in July. And I think that would be a combination when we get there. The the latter to pass, which is we do think they'll probably regain confidence that inflation's on the right path and that, you know, I think if you see the momentum in today's report carried through in the in the May and June reports, I think that would also give them I wouldn't say concern about the labor market, but it would elevate the employment mandate in terms of its importance for policy going forward.
Phoebe White: Right. And I guess, you know, we should be seeing some progress by the time we get to that meeting. I guess some would say, you know, we had these three stronger than expected inflation reports. Do we need to see at least three weaker or at least, you know, softening prints, too, for the Fed to kind of get there and for the committee to feel comfortable? Do you think that we could see enough progress in three months?
Mike Feroli: I think it's possible. You know, certainly I think today was the first post may of FOMC test, and I think we passed it. So we still have, you know, two more jobs reports and then a couple KPIs as well. So I don't think it's solely the inflation numbers, but measures of inflation pressures such as wages measures, inflation expectations.
Mike Feroli: And we think we think again, it's not an easy path, but we do still think there's a path they got to get to for a season July. And as I said, we've only had one test so far and we passed that one test. But there's a couple more to come.
Phoebe White: Right. And if I guess we don't get there by July, of course, you know, Powell was asked in the press conference about how much the election matters. You know, of course, he said the Fed is independent, but how much do you think the election matters in their decision come September?
Mike Feroli: It's really hard to know. You know, I think his answer was, you know, of course, he had to say it doesn't matter, because I do really think he believes in his heart of hearts that the Fed is and should be a nonpartisan body. And I think the other easy thing to say is that, look, if we got, you know, payrolls, the August payrolls in early September, those show a big contraction in employment.
Mike Feroli: They're going to cut in September. Right. I think it becomes trickier and a harder call to say if it's a you know, if it's a close call in September, does that factor in a little bit subconsciously in their thinking? And that's I think that's anyone's guess.
Phoebe White: Right. Okay. And how about after the election get to December onwards? How are you thinking about the path of cuts beyond kind of that first initial cut?
Mike Feroli: Yeah. So we think if we get back on track in terms of the disinflation like we were seeing in the second half of last year, much of which will come down to as I think there was at least twice when Powell was, you know, had to talk about shelter inflation, you know, that shelter inflation gets back on track and the disinflation process more generally comes together.
Mike Feroli: We think we could see cuts at a pretty leisurely pace, perhaps once a quarter, though obviously a lot could change in the policy setting outside of monetary policy after the election, which could also change how we're thinking about things.
Phoebe White: So after this morning's report, markets are back to pricing in nearly two full eases by the end of this year and 125 basis point of easing by the end of next year. So still a little less than our own baseline forecast. And with that, we still target ten year yields moving lower over the balance of the year from above, just above 450 right now towards 4% by the end of the year.
Phoebe White: With that, let me close, Mike, thanks so much for your time today.
Mike Feroli: Thanks for having me.
Phoebe White: And thanks to our listeners for tuning in. We hope you join us again next month. For more research insights, visit J.P. Morgan dot com slash research.
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