April jobs data better than expected, and a look ahead

The labor market is holding steady

The US added a better-than-expected 177K jobs in April. With revisions lower to the past two months’ data, the labor market is right where market participants expected it to be. Meanwhile, unemployment is holding steady at a good rate of 4.2% and the participation rate at 62.6% is right in the middle of its narrow range over the past two years. With April’s data in hand, we can conclusively say that the labor market continues to be solid.

With labor income being the fuel for the US consumer, who are in turn the engine of the US economy, this suggests the economy remains on track. Elevated macroeconomic and business uncertainty emanating from Washington, DC, along with the implementation of tariffs which will have a contractionary impact on the economy, have us watching the labor market closely for any signs of change. So far, though, those signs remain in the “soft” data such as surveys rather than the “hard” data of economic statistics like the April jobs report.

Q1 GDP contraction belies true picture

This uneventful labor market data follows a GDP release which also didn’t reset any expectations, despite scary-sounding headlines that the economy contracted at a –0.2% annualized rate in the first quarter. No, that was not a signal of a recession, although the risk of one remains elevated in the coming quarters due to policy uncertainty and tariffs.

Short-run GDP data can be noisy for a few reasons, with imports and exports a common culprit. As businesses raced to stock up on imported goods ahead of the imposition of tariffs, that created a surge in imports and inventories during the quarter. Mathematically, this has a negative effect on GDP, which is what caused the sharp change. This was widely expected given the situation with tariffs. Personal consumption, more representative of the underlying health of the economy, came in at a reasonable 1.8%. Nothing in the GDP report changed our views on the current macroeconomic landscape; it was all quite as expected.

Looking ahead

The Federal Open Markets Committee (FOMC) will meet on May 6 and 7. We (and the market) overwhelmingly expect them to hold rates steady. We continue to expect the Fed to cut rates by 0.75 percentage points over the remainder of the year, with the risks skewed toward more cuts if the trade war slows growth.

In addition to macroeconomic data, we’ve had over half of the S&P 500 report earnings so far, with mixed results. Tariffs, unsurprisingly, have dominated management teams’ discussions. Another large group of companies reports during the week of May 5, and we’ll have a pretty full view into how different sectors and companies are responding with those earnings releases and calls complete.

On May 13, we’ll get the April CPI release. We’re not expecting any surprises there, though there is some possibility that companies began raising prices in response to tariff announcements rather than waiting for the tariffs themselves to start hitting their supply chains.

Final thought

Overall, it could be a surprisingly insignificant month on the economic data front, since evidence of the macro uncertainty impacting the economy won’t likely show up in the numbers for a few more weeks. Nonetheless, we have our ears open, and our eyes cast toward Washington, as that’s where market-moving news is most likely to emerge in the coming weeks. As we noted on April 28, we’re encouraged by a change in tone over the last two weeks and are optimistic that we may have seen the worst of this crisis. To be clear, damage has been done and we may still land in recession, but much of that may have been priced in when we were trading at lows in early April.