Making Sense of the Jobs #

Episode Summary

Executive Summary: The episode focused on the surprisingly strong May jobs report, highlighting robust payroll gains, broad hiring, and wage growth that remain compatible with solid income creation, while also emphasizing the weak household survey, rising unemployment rate, and distortions from immigration and seasonal effects. The hosts then pivoted to upcoming CPI data and the Fed, expecting modest disinflation but warning that a hot inflation print could delay cuts.

Main Topics: May jobs report: strong payrolls, solid trend growth (Priority: 5/5): The establishment survey showed 272,000 jobs added in May, with broad-based gains across healthcare, leisure and hospitality, public sector, and professional/business services. The panel argued underlying job growth is running around 250,000 per month, stronger than historical expectations and not yet showing clear slowdown. Household survey vs. payroll survey divergence (Priority: 5/5): The household survey showed a decline in employment and labor force, pushing unemployment to 4.0%, creating a stark contrast with payroll gains. The hosts argued this gap is largely due to population-control issues and immigration not being fully captured in Census-based population estimates. Immigration and labor supply effects (Priority: 4/5): Immigration was presented as a major reason the labor market can sustain high payroll growth without overheating. The panel said labor supply has expanded enough to absorb strong hiring, but the same influx is likely undercounted in the household survey and complicates forecasts. Labor market soft spots and risk balance (Priority: 5/5): Despite strong headline job creation, hiring, job openings, quits, and hours worked have softened, especially for entrants trying to get into the labor market. The discussion debated whether the bigger risk is renewed labor-market overheating or a slowdown/weakening in labor demand. Productivity, wages, and inflation (Priority: 4/5): A side discussion centered on productivity growth of 2.3% over four quarters, which could help reconcile 4% wage growth with the Fed’s 2% inflation goal. The panel discussed unit labor costs, profit margins, and why current wage growth may not be inflationary if productivity stays strong. Upcoming CPI and Fed meeting (Priority: 5/5): The team previewed May CPI, expecting modest cooling in headline and core inflation, with shelter and auto insurance still key variables. They said the Fed is unlikely to cut this week, but the inflation release could influence whether a September cut remains on track.

Key Arguments: Payroll employment is still growing at a trend rate around 250,000 per month, which is unusually strong and broad-based across industries. The unemployment rate at 4.0% is more a sign of household-survey weakness and measurement issues than an imminent recession signal. Immigration has materially expanded labor supply, allowing strong job growth without a commensurate rise in wage inflation or a falling unemployment rate. The household survey is likely undercounting immigrants because it relies on Census population estimates that have not fully reflected the recent immigration surge. Prime-age labor force participation and employment remain historically strong, suggesting underlying labor-market health despite noisy overall household data. Current wage growth around 4.1% is not necessarily inflationary if productivity growth remains near 2% or better. The main labor-market risk may be a slowdown in hiring demand or a sentiment-driven deterioration, but layoffs are still too low to suggest a break in the economy. The biggest near-term policy risk is a hotter-than-expected CPI report that could push out expected Fed rate cuts. The Fed is focused primarily on inflation, but should communicate more clearly about shelter-adjusted inflation measures given known OER distortions. Higher interest rates may be reinforcing housing-supply constraints, keeping shelter inflation sticky and complicating the Fed’s disinflation path.

Data Points: Payroll jobs added: 272,000 - May headline nonfarm payroll gain from the establishment survey. Three-month average payroll growth: ~250,000 per month - Underlying trend job growth discussed by the panel. Wage growth month-over-month: 0.4% - Average hourly earnings rose 0.4% in May after 0.2% in April. Wage growth year-over-year: 4.1% - Average hourly earnings growth on a yearly basis in May. Unemployment rate: 4.0% - Household survey measure, first time at 4% since January 2022. Household employment change: -400,000+ - Employment fell in the household survey even as payrolls rose. Labor force change: declined - Household survey showed the labor force shrinking in May. Prime-age labor force participation rate: 83.6% - Highest in the current cycle and highest since around 2001-2002. Prime-age employment-population ratio: 80.8% - Held near cycle highs and very close to full-employment territory. Payroll vs. household employment gap over 12 months: 2,756,000 vs. 216,000 - Illustrates the widening divergence between establishment and household survey concepts. Year-over-year productivity growth: 2.3% - Four-quarter productivity growth discussed in the game segment. Unit labor costs year-over-year: 1.0% - Used to argue inflationary pressure from labor costs is contained. Headline CPI forecast for May: 0.1% m/m - Matt Collier’s estimate for the upcoming CPI release. Core CPI forecast for May: 0.3% m/m - Expected core CPI increase, with a discussion that 0.26% would round to 0.3%. Headline CPI y/y forecast: 3.3% - Expected to fall from 3.4% if monthly inflation is 0.1%. Core CPI y/y forecast: 3.5% - Expected to ease from 3.6%, the lowest in the post-pandemic cycle. Current quarterly GDP estimate mentioned: 1.9% - Mark corrected the estimate when discussing current growth. CBO estimated immigration last year: 3.3 million - Used to underscore how far immigration has exceeded typical levels.

Pivotal Quotes: "It’s a great labor market if you’re already in it, but it’s not a great labor market if you’re trying to get into it." — Dante D'Antonio: Summarizing the split between strong overall labor conditions and weaker opportunities for job seekers. "I think the risk is still stronger that the labor market starts overheating again than it sort of falls off the wheel." — Dante D'Antonio: Explaining his view that renewed labor-market strength may be a bigger near-term risk than a sharp downturn. "The labor market is resilient. It’s done a great job navigating things so far. But the longer you keep rates as high as they are, at some point, things start to break." — Mark Sandy: His view that strong labor data may mask fragility under prolonged restrictive monetary policy.

Implications: Listeners should expect a still-resilient labor market, but with more noise from immigration, demographics, and survey methodology. Near-term attention shifts to CPI and the Fed, where a mild inflation print supports a September cut; a hot print could delay easing.