Is the Economy Flashing a Warning?

If you quickly scanned your smartphone on Friday evening before your Cinco de Mayo margarita, you might have thought that all is well with the U.S. economy. Stocks jumped on the last trading day of the week, after the April employment report came in better than expected. But a look under the hood of that gleaming report shows that there could be problems lurking in the thus-far resilient labor market.

While a gain of 253,000 jobs was better than the 180,000 expected, the previous two months were revised lower, for a total of 149,000 fewer jobs than originally reported. With these revisions, the three-month average payroll gain now stands at 222,000, its weakest 90-days since January 2021. Additionally, economists are keeping an eye on employment in temporary help services, a category that can often presage a hiring boom or bust. Temp services lost 23,000 positions in April and is down by 174,000 since its peak in March 2022, which could signal that there could be a sharper slowdown in the labor market.

There was another Labor Department report released earlier in the week that indicated that the U.S. engine of employment growth could be sputtering a bit. The Job Openings and Labor Turnover Survey (JOLTs), which lags the monthly jobs report by a month, showed that layoffs rose in March to the highest level since December 2020 and job openings fell to their lowest level since April 2021. Although openings remain above pre-pandemic levels, over the past three months, they are down by 15 percent, which is consistent with a labor market that is slowing down.

Of course, slowing job growth is exactly what the Federal Reserve is seeking. When the central bank raised short term interest rates for the 10th consecutive time at the May meeting, it cited still high prices and a labor market strong enough to withstand another 0.25 percent increase. But in his press conference, Chair Powell acknowledged that the central is closing in on its terminal rate, or the rate where this rate hiking cycle concludes. “We're closer, or maybe even there,” so most now believe that the Fed will pause at the June meeting and reassess how the economy is responding to the most aggressive campaign since the early 1980s.

Currently, there is no evidence of a recession in the U.S. economy, but like any driver who sees the “Check Engine” light illuminated, it makes sense to proceed with caution.