May Employment: Narrative Changer?
Business confidence, data lags & mismeasurement, small business struggles, wages cooling, bad is probably bad, for now
Narrative Buster?
The initial reaction to the second consecutive ADP employment report, lower stocks and bull flattening in Treasuries led by real rates (TIPS), highlights how imbedded the ‘solid’ labor market narrative is in investor expectations. Following the April Trump Tariff Shock, markets discounted higher employment, weaker consumption and capital investment, and the deep inversion of the breakeven inflation curve suggested any goods prices increase would lead to lower demand and ultimately a lower rate of inflation. As the probability of the trade surplus penalties ~25% global tariff fell, market participants, and FOMC officials, became increasingly convinced the economy could absorb a more benign 10% tariff outcome. All of the focus on trade obfuscated the damage the Fed’s unbalanced policy has been inflicting on small businesses. Additionally, while S&P 500 constituents likely have the margins and diverse supply chains to absorb higher tariffs, small businesses are more vulnerable.
The labor market data for we’ve seen for May, weekly initial and continuing jobless claims, Federal Reserve manufacturing and service providing industries surveys, the Conference Board Labor Differential, ISM manufacturing, services and the May ADP tepid 37,000 increase, following a soft 60,000 April increase, suggest demand for labor was weak in May. It seems likely Friday’s BLS employment situation report will be soft, and as a consequence, it will be a narrative buster for both investors and the FOMC. Because labor force growth is slowing due to the collapse in immigration, the unemployment rate and wage growth are more important than headline employment growth.
