Friday Employment Report Requires New Interpretation

Wall Street anticipates the April jobs report will be out tomorrow, predicting that non-farm employment will rise by around 55,000. The unemployment rate is expected to stay at 4.3 percent, and average hourly wages could see a year-over-year growth of 3.8 percent. If these payroll figures align with predictions, you might hear descriptors like “anemic,” “stumbling,” and “stalling.” But it’s crucial to disregard these labels and rethink how to assess the report.

Such terminology reflects outdated beliefs about the labor market that simply don’t apply anymore—and likely won’t do so for the foreseeable future.

The traditional approach interprets low employment figures as signs of economic weakness. This perspective has roots in economic theories associated with John Maynard Keynes, which suggest ongoing struggles with labor demand. It harkens back to the aftermath of the Great Recession, when insufficient demand from employers limited hiring. In that context, when job growth fell below 100,000, it signaled reluctance from companies to hire and raised fears of a recession. The reasoning was straightforward: there were always more people seeking jobs than job openings available.

However, that scenario has changed. We now find ourselves in a labor market where the issues are more about supply constraints. The era of significant immigration, which previously provided an overflow of labor, has ended. Consequently, the break-even job creation rate—needed just to maintain the current unemployment rate—has significantly decreased from about 250,000 jobs monthly during the Obama administration to nearly zero. Studies from the Dallas Fed and the Federal Reserve have suggested this shift for a while, but many analysts have not yet fully grasped its implications.

Furthermore, the demand for labor is unusually strong. Excluding the pandemic’s effect, the unemployment rate has consistently remained below levels that economists previously regarded as healthy for the economy. What used to be considered signs of an overheating economy have now become the new standard.

Supporting this is hard evidence. New unemployment insurance claims recently hit 200,000, a slight increase from 190,000 the week prior and the lowest number since 1969. The four-week rolling average for applications is down by 96 percent since 1967. Continuing claims have also fallen to 1,766,000—the lowest number in two years—indicating that people aren’t losing their jobs. Employers are hanging onto workers, as replacing them is challenging and costly. This behavior doesn’t point to a demand problem in the economy.

The Small Number of Job Openings Doesn’t Reflect Labor Market Slack

Your new perspective should begin here. A gain of 55,000 jobs—or even less—doesn’t carry the implications that many analysts ingrained in the previous framework might assume. It’s not indicative of an economy struggling to generate jobs. Instead, it shows we’re moving toward a genuine balance between the number of workers and available positions.

This distinction is crucial for interpreting tomorrow’s figures. If the job creation number falls short of expectations, the instinct may be to view it as a sign of weakness. Conversely, if the numbers exceed forecasts, there might be a tendency to label it as a sign of resilience. Yet both reactions reflect the same fundamental misunderstanding: what really drives hiring is the willingness of employers, not merely the number of available workers.

The Federal Reserve grapples with this issue as well. New York Fed President John Williams noted “conflicting signals” from the data, with solid hard data suggesting stability countered by softer indicators pointing to weakness. He referred to “increasing slack in the labor market,” which is a misinterpretation. What he sees isn’t slack at all; it’s a labor market where traditional measures of strength have lost their relevance, adapting to a landscape where abundant labor is no longer a given.

We haven’t experienced such a low growth rate in the labor force in living memory. The post-war baby boom, women’s increasing participation in the workforce, and decades of immigration ensured a steady influx of workers. Analysts, economists, and the public have built interpretations around payroll numbers during this era, making it challenging to reconcile these views with a labor market that is shedding redundancy.

So, as you prepare to read tomorrow’s numbers, approach them with this new understanding.