Friday’s Jobs Report Needs a New Decoder Ring
Wall Street expects tomorrow’s April jobs report to show a gain of around 55,000 nonfarm payrolls, with the unemployment rate holding at 4.3 percent and average hourly earnings up 3.8 percent year over year. If the headline payrolls number comes in anywhere near that consensus, expect to hear words like “anemic,” “stumbling,” and “stalling.” Here’s why you should ignore them — and how to read the report instead.
Those words betray a set of assumptions about how the labor market works that no longer apply — and arguably haven’t applied for some time now.
The old playbook treats low payroll numbers as evidence of economic weakness. It’s partly rooted in an approach to economics often associated with John Maynard Keynes that expects the economy to be persistently plagued with inadequate demand for labor, goods, and services. And, more concretely, it is a holdover from the post-Great Recession era, when inadequate employer demand was the binding constraint on the labor market. In that world, employers had their pick of workers. Job gains below 100,000 meant firms weren’t willing to hire, which meant something was wrong with demand, which meant recession risk was rising. The logic was straightforward because the labor supply side of the equation was essentially infinite. There were always more people who wanted to work than there were jobs available.
That world is gone. What replaced it is a labor market in which the constraint has flipped to the supply side. The era of mass immigration supplying a steady stream of excess labor is over. As a result, the break-even rate — the number of new jobs the economy needs each month just to keep the unemployment rate stable — has fallen from the roughly 250,000 per month figure that became conventional wisdom during the Obama years to something closer to zero. Research from the Dallas Fed and the Federal Reserve Board has been pointing in this direction for quite some time, but the implications still haven’t sunk in for most analysts.
What’s more, demand for labor is extraordinarily strong. Except for the pandemic lockdown period, for years now we’ve been consistently below levels of unemployment that economists once thought were the markers of a healthy economy. Unemployment rates that once would have been seen as evidence the economy was overheating are now the norm.
The hard data confirm this. Today’s initial jobless claims came in at 200,000, up slightly from last week’s 190,000, a reading which tied for the lowest reading since 1969. The four week moving average of claims is lower than it has been 96 percent of the time in records going back to 1967. Continuing claims fell to 1.766 million, the lowest in over two years. People are not losing their jobs. Employers are holding on to workers because replacing them has become difficult and expensive. This is not the behavior of an economy with a demand problem.
Low Jobs Numbers Do Not Equal Labor Market Slack
The new playbook starts here: a payroll gain of 55,000 — or even something lower, even something close to zero or edging into negative territory — does not carry the meaning that a generation of analysts trained in the old framework instinctively assigns to it. It is not evidence of an economy too weak to create jobs. It is evidence of an economy that is no longer being flooded with excess labor supply — and that is operating closer to a genuine equilibrium between workers and jobs.
This distinction matters enormously for how you read whatever number comes out tomorrow morning. If payrolls come in below expectations, the instinct will be to call it a sign of weakness. If they come in above, the instinct will be to call it a sign of resilience. But both reactions embed the same error: they assume the driver is employer willingness to hire rather than worker availability to be hired.
The Federal Reserve is struggling with this, too. New York Fed President John Williams this week acknowledged “conflicting signs” — hard data showing stability alongside soft data pointing to weakness. He described this as “increasing labor market slack,” which is precisely the wrong read. What he’s seeing is not slack. It’s a labor market where the old signal-to-noise ratio has broken down because the signals were calibrated to a world of abundant labor that no longer exists.
We haven’t had a period of genuinely low labor force growth in living memory. The post-war baby boom, the entry of women into the workforce, and decades of immigration all ensured a steady supply of new workers. Analysts, economists, the media, and the public all built their intuitions about what job numbers mean during that era. Adjusting those intuitions to a labor market no longer running on surplus is proving to be extraordinarily difficult — and it shows every month on Jobs Friday.
Tomorrow, read the number with the new playbook.
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