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That's a sexy topic to write about (said no-one ever)...

Well, times are changing!

Not promising to make it sexy (if I could I'd be doing this on OnlyFans and stacking dollars)...

Let's break the big picture down, figure out what's really going on and see what matters...

Starting here:

April’s expected hiring boom goes bust as nonfarm payroll gain falls well short of estimates
Hiring was a huge letdown in April, with nonfarm payrolls increasing by a much less than expected 266,000 and the unemployment rate rose to 6.1%.

  • Hiring was a huge letdown in April, with nonfarm payrolls increasing by a much less than expected to 266,000
  • March’s originally estimated total of 916,000 was revised down to 770,000, though February saw an upward revision to 536,000 from 468,000.
  • The unemployment rate rose to 6.1%, the Labor Department said
  • Dow Jones estimates had been for 1 million new jobs and an unemployment rate of 5.8%

It was an ENORMOUS miss.
Invariably, when things don't turn out as expected, there's always an easy explanation available...

"The disappointing jobs report makes it clear that paying people not to work is dampening what should be a stronger jobs market," U.S. Chamber of Commerce Chief Policy Officer Neil Bradley said in a statement on Friday.
"One step policymakers should take now is ending the $300 weekly supplemental unemployment benefit. Based on the Chamber’s analysis, the $300 benefit results in approximately one in four recipients taking home more in unemployment than they earned working."

Some states have taken this 'analysis' to heart...

Republican governors in Arkansas, Montana, South Carolina and Mississippi have announced an early end to the benefits with the Arkansas governor saying:

“Continuing these programs until the planned expiration date of Sept. 4, 2021, is not necessary and actually interferes with the ability of employers to fill over 40,000 job vacancies in Arkansas,”

Can it really be that simple?

Give people free money and they'll just sit around all day, devoid of all pride in themselves or their endeavours, zero drive to improve their lot in life or do anything more than merely survive on government handouts...

Surely this stereotype is the exception rather than the rule?

Even Morgan Stanley analysts got in on the act:

"The miss in nonfarm payroll growth in April certainly gives some credence to anecdotal reports of labor shortages and individuals not returning to work while remaining on supplemental unemployment benefits, suggesting this is a supply-side rather than a demand-side issue,"

Now, this (supply-side) 'labor shortage' has got some attention...

It’s not a ‘labor shortage.’ It’s a great reassessment of work in America.

Hiring was much weaker than expected in April.
Wall Street thinks it’s a blip, but there could be much deeper rethinking of what jobs are needed and what workers want to do on a daily basis.

While there's a record number of jobs open in America...

8.1 million job openings according to the March JOLTS (Job Openings & Labour Turnover Survey)

Which roughly matches the number of jobs still to recover since the pandemic struck.

So people should just get their heads out of the clouds, suck it up and get back to work, problem solved?

Again, not so simple.

It's all a bit of a mess.

Between the unemployment benefits providing a safety net, people rethinking their careers, some taking early retirement, schools not reopening (childcare costs can dis-incentivise one parent returning to work), plus anecdotal reports of skills mismatches, it's impossible to draw conclusions.

There's also the option of working from home now...

One data point does not signify a trend, but it's going to be a bumpy ride back to 'full employment'...

I'm not so sure about those wage pressures just yet...

Anyway, full employment.

What is it?

The Fed's AIT framework redefines this.

They abandon the old Phillips Curve & NAIRU (Non Accelerating Inflation Rate of Unemployment as measures...

The old theory was that once you reach 'maximum employment' it would put upward pressure on inflation, (so it was therefore time to tighten rates)

It didn't work out so now they're aiming for an even lower unemployment rate AND inflation sustainably above 2% before hiking rates.

A lower unemployment rate than previously thought possible, as without a tight labour market there's no upward pressure on wages therefore inflation cannot be sustained.

Explainer (thread) 👇

Fed Governor Lael Brainard gave a speech back in February titled:
How Should We Think about Full Employment in the Federal Reserve's Dual Mandate?

The new framework calls for monetary policy to seek to eliminate shortfalls of employment from its maximum level, in contrast to the previous approach that called for policy to minimize deviations when employment is too high as well as too low.
The new framework also defines the maximum level of employment as a broad-based and inclusive goal assessed through a wide range of indicators.

The inclusive part of this focuses on the differences between racial & ethnic groups, and that Black & Hispanic groups often suffer higher than average unemployment...

Obviously the Fed cannot target monetary policy at different groups, but they do believe that keeping monetary policy 'looser for longer' will help close that gap...

Which indicators are they looking at?

One of those indicators is (obviously) the Unemployment Rate: a good generaliser, but misses important details...

Labour force participation rate:

The Employment:Population ratio

This graphic focuses on prime-age only (and is only until January)

And this is the overall EPOP ratio

All of which shows that there's still a LONG way to go before a return to full employment...

Some question their stance (especially after today's high inflation print), but they are committed to this path now, and it's clear they genuinely believe current inflation is transitory 👇


The labour market is the one to watch for Fed tightening.

Just zoom out for a second and consider what happens if the Fed suddenly start hiking rates with 6 or 7 million still unemployed and businesses (many with high debt levels) just about getting back on their feet.

The economy slows down, default concerns grow, and the Fed has to cut rates and/or start QE again.

Back to square one.

This framework is aimed at dealing with long-lasting structural issues in the economy and the Fed are unlikely to be swayed by short term supply crunches.

They want maximum employment, and the picture is unlikely to clear until September/October with schools open, enhanced unemployment benefits expired...

Then we'll get a good look at a reopened economy standing on its own two feet again and start making informed judgements...

Until then, it's highly likely that the market will over-react to every NFP and every CPI print.