No Flowers for the May Jobs Report?

The US labor market added more jobs than expected in May. Huzzah? While we find this happy news, most pundits saw the glass as half empty instead of cheering. A common line of thinking we saw: Sure, the labor market is recovering from late-2025’s soft patch, but that means a Fed rate hike is inevitable this year. Some even blamed Friday’s Tech-led selloff on the report. It is a classic good news-is-bad-news reaction—further evidence that, while sentiment may be heating up toward US Tech, moods aren’t universally elevated.  

First, May’s solid numbers: As the unemployment rate held steady at 4.3%, nonfarm payrolls rose by 172,000, beating consensus expectations of 105,000 and adding to April’s upwardly revised 179,000 gain.^[i] At an industry level, leisure and hospitality led growth (up 70,000 jobs, well above its average monthly gain of 14,000 over the prior 12 months) thanks to hiring at food services and drinking places while financial activities (-22,000) detracted.^[ii] The report also indicated hiring was stronger than initially estimated the prior two months: The Bureau of Labor Statistics (BLS) revised March’s nonfarm payroll change up from 185,000 to 214,000 and April’s estimate from 115,000 to 179,000.^[iii] Combined, nonfarm employment in March and April is 93,000 higher than previously reported, and in the three most recent reporting months, private-sector employment is up 202,000, 177,000 and 120,000, respectively.^[iv] It isn’t about government, a May uptick in local government hiring notwithstanding.

Sounds great, right? With so many fearing weaker jobs data earlier in the year—see the “low hire, low fire” concerns following February’s “bad report”—you could be forgiven for seeing this as a salve.^[v] But not all seemed to think so, as many worry strong data mean the Fed is likely going to hike this year. The Fed is, of course, mandated to balance employment and inflation, maximizing the former while keeping the latter stable and low. Many (in our view, wrongly) presume tighter labor markets exert wage pressures, which raise prices. There is little evidence of this, mind you, and Nobel laureate Milton Friedman proved 60 years ago that wages follow prices. But it is conventional wisdom.

With employment now strengthening, many economists and pundits think the Fed will emphasize the inflation end of its dual mandate. That is doubly true given the recent pickup in inflation and the fear of it extending. But we suggest investors hold their horses. First, nobody can predict what central bankers will do. From Ben Bernanke and Janet Yellen to Jerome Powell and now Kevin Warsh, Fed heads’ words, speeches and interviews garner a lot of attention. So do their fellow policymakers on the Federal Open Market Committee, which dots the press lately. But it is impossible to accurately project how one person (let alone a dozen people) interprets the economic environment and then votes. Second, as we wrote last month, rates don’t drive stocks. This bull market began while the Fed and others were hiking bigtime. It persisted amid a hold, some cuts and another hold since.

Besides, a hike—if that is what we get this year—likely isn’t a gamechanger or even warranted, in our view. Consider the alleged issue a rate hike is supposed to address: hotter inflation due to higher energy prices tied to the Iran war. Yet inflation isn’t just about one category. Rather, it is always and everywhere a monetary phenomenon, in which too much money is chasing too few goods and services. On this front, US money supply is growing at prepandemic rates—unlikely to fuel faster price growth. Looking outside energy and other volatile categories (like food), other prices aren’t galloping higher. Now, it isn’t all smooth sailing. Higher prices at the pump may force some households to make tough choices and cut back on certain discretionary purchases. But this isn’t what happened earlier in the decade, when the Fed spiked money supply in response to the COVID pandemic and hot inflation followed a couple years later. As for jobs? A lot more goes into businesses’ hiring and firing decisions than monetary policy—the Fed’s influence here is vastly overrated.

The focus on possible future hikes instead of the overall fine jobs numbers shows US sentiment isn’t broadly elevated. Outside US Tech, sentiment appears relatively more tempered. Besides Fed rate concerns, observers have fretted about the sustainability of US consumer spending, as credit card delinquencies rise and gas prices remain high. Consumers in general are feeling down—not indicative of where markets are going, but a signal the broader environment is far from frothy. While we do think there are reasons to believe Tech sentiment is elevated—see the recent chatter about big Tech IPOs to come—the same doesn’t apply across the entire market. So even though sentiment in the US is relatively higher than non-US markets, we don’t think it is at broad euphoric levels yet. The bull market still has room to run, in our view.