The US labour market is holding up

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US jobs and market recovery

After a (deceptively) negative GDP print and a string of dire sentiment readings, there was a lot of market anxiety surrounding Friday’s jobs report. If the April numbers came in below expectations, it would be the hardest evidence yet that uncertainty and tariffs are taking their toll on the US economy. 

Didn’t happen: 177,000 jobs were added, well above the consensus forecast of 138,000, and the unemployment rate held steady at 4.2 per cent. The market rejoiced, with the S&P 500 up over 2 per cent. The 10-year Treasury yield bumped up 10 basis points as investors paired back expectations for Fed cuts.

Indeed, the monetary policy implications are key. On Friday, markets went from betting on four 25 basis point cuts by year’s end to just three, as it looks like the labour market is not wilting in the current rate environment. That gives the Fed room to focus on inflation. The jobs report’s wage growth reading came in lighter than expected, too, only rising 0.2 per cent month-on-month. Standing pat on rates looks like the right decision.

In this uncertain climate, it is tempting to be a bear about every single economic reading. And, in all honesty, there was a lot in the report to dislike. March and February’s readings were downgraded by 58,000 jobs in total. That brings the three month average down to 133,000. This may seem strong enough, but remember that the US labour market has grown a lot in recent years, and as such we may be below break-even jobs growth. Also, according to David Rosenberg at Rosenberg Research, around 40 per cent of the headline increase came from the “birth-death” model, the estimate of jobs created by new business formations and jobs eliminated by firm closures. The birth-death model has been a little off since 2020 — and was responsible for a historically large revision last year. Rosenberg reckons that, accounting for a birth-death skew and the downward revisions, April’s payroll report actually showed a decline of 11,000 jobs. But it is very hard to know how off the birth-death model is.

But there were some real bright spots in the report, too. Over half of the job growth came from cyclical industries (private, excluding healthcare) — particularly warehousing, which could be a side effect of the recent surge in imports. 518,000 people entered the labour force, even with low migration. That suggests optimism about work prospects. And, despite concerns over Doge’s impact on the federal government, the rate of federal job losses slowed last month, and was revised down for March:

On balance, Friday’s report was good news. Like the GDP report, it shows the US economy is standing strong. Yet, we are still on the precipice. The worst of the tariffs have not hit yet, and still could. Until they do, employers seem to be OK with growing their work force. That could change.

China

China is apparently open to trade talks with the US, and Trump is signalling flexibility on tariffs, too. If the signals reflect genuine intent, this is undoubtedly good news. But Unhedged is a bit sceptical on both fronts. Despite appearing open to negotiations earlier this year, ever since “liberation day” the Chinese government and the Chinese people have expressed determination to stand their ground; Trump and his trade adviser Peter Navarro have explicitly signalled unwillingness to negotiate with China in the past.

But if China is softening its position, the most likely reason is that its economy is wobbling, while the US enters the tariff fight on the front foot (see above).

According to official statistics, China’s economy grew 5.4 per cent year-over-year last quarter — above expectations and higher than China’s goal of 5 per cent. Chinese macroeconomic data should be taken with a grain of salt, however. Other indicators suggest softness. The Li Keqiang index, a popular proxy for China’s GDP that uses indicators ranging from train schedules to bank lending, expanded at 4.3 per cent year-over-year last month. Another alternative (and our favourite), the Capital Economics China Activity Index, put the growth rate at just 3.9 per cent. 

Whatever strength there was may have come from a surge in exports, as buyers in the US rushed to import Chinese goods ahead of tariffs. But to replace US demand in the coming months, China will need to find new buyers at home and abroad. That will be hard. Europe might erect its own trade barriers, and Chinese domestic consumption has not shown signs of life.

Low foreign demand risks adding to China’s deflationary woes, too. China’s inflation looked better last month, with core CPI jumping above 0 after a month in negative territory. But if the manufacturing sector cannot find new buyers, domestic supply will increase and prices will drop further.

Recent soft data has been even weaker. Consumer confidence is in the dumps. And China’s Caixin manufacturing PMI, out last week, showed that manufacturing contracted in March, driven by a collapse in the new orders reading, particularly new export orders. Inventory levels fell, too, in a sign that businesses are not feeling optimistic:

For the past 9 months or so, China boosters have waved away these concerns, buoyed by the promise of economic stimulus. But the stimulus has been more of a pop gun than a bazooka. And it looks like even the pop gun could go silent soon. According to Zichun Huang and Leah Fahy at Capital Economics, the budget deficit grew by 40 per cent annualised in the first quarter. That is double the planned rate of fiscal expansion for this year, they write. In other words, China will need to borrow more — much more — than planned to keep the current level of stimulus, and even that has not been particularly effective. Given the government’s reluctance to expand borrowing in the past, more stimulus could be a step too far.

Unhedged and various other commentators have observed that China may be in a better political position than the US for prolonged negotiations. Economically, however, it holds fewer cards.

One Good Read

Chinese diversification.

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