Last week’s jobs report brought welcome news to investors, painting a picture of a strong U.S. labor market that continues to find balance. The economy added 177,000 jobs in April, surpassing the median expectation of 138,000. Employment gains were also broad-based, with increases across leisure and hospitality, healthcare, transportation, and construction—to name a few sectors.
[This news, however, is backwards looking, and the thing on everyone’s minds is tariffs. More on that later.]
Steady Unemployment Rate
The unemployment rate remained unchanged at (a low) 4.2%. A stable, healthy unemployment rate suggests that the labor market remains on solid ground and that the economy is operating under favorable conditions—for now.
Easing Wage Growth
Wage growth decelerated to 3.8% year-over-year. Easing, though still strong, wage growth points to an economy finding greater balance between labor demand and supply. Wages, our price on human capital, are an indicator of tightness or slack in the labor market. Today’s print makes life slightly easier for Federal Reserve policymakers trying to wrangle inflation while preserving full employment.
With inflation clocking in around 2.5%, workers are still garnering purchasing power, a driving force behind consumer spending. (But that could change.)
Strong Workforce Participation
Workforce participation remained robust, with over half a million individuals joining the labor force last month. Rising supply of labor signals a sustained confidence in job availability. Typically, when labor market conditions deteriorate, workforce participation drops as job seekers become discouraged.
Implications for the Macro Outlook: We Know What We Don’t Know
While the jobs report paints a positive picture of the economy’s underpinnings and momentum, it is essential to remember that this data is backwards looking. The economic horizon remains clouded by policy uncertainty at the federal level.
In today’s environment, the two most significant variables are the clarity and severity of tariffs. The ongoing lack of definitive tariff policy breeds uncertainty, which breeds indecision. Enough indecision can cause the economy to seize, creating a self-fulfilling downturn. The sooner firms know what lies ahead, the better.
Severity points to the magnitude of cost increases that firms and consumers will bear. Tariffs are, ultimately, a tax. For firms, this means an erosion of margin (and, thus, earnings) depending on how much increased cost they pass onto consumers. For consumers, higher prices mean less inflation-adjusted spending. As consumption accounts for over two-thirds of U.S. GDP, a weaker consumer means an overall weaker economy.
Implications for Corporate Investors: Monetary Policy Is Murky
For CFOs and corporate investors, allocations hinge materially on the trajectory of monetary policy. Currently, markets are anticipating three to four additional policy rate cuts from the Fed this year, transitioning from restrictive territory to a more neutral stance. Cash will continue to lose its appeal; longer duration securities will offer more yield.
But this assumes markets are right. At present, they’re priced for one of the following: Either the Fed will cut because the economy deteriorates as tariffs bite, or the Fed will cut because we continue to see more (Goldilocks) reports.
There are more paths, however. Cash could outperform if the Fed cuts less than anticipated in the face of an outperforming economy and/or high inflation that the Fed wants to contain. On the other hand, if tariffs prove too severe, the Fed could cut more than expected, trying to salvage a spiraling economy, despite inflation.
Given our lack of clarity, the base case for 2025 is for the economy to muddle through, with a resilient consumer outperforming expectations. (This implies tariff rates that land higher than many anticipate but still far lower than those announced on April 2.) Current market pricing of three to four additional cuts from the Fed this year seems reasonable. But we’ll know more at the end of the 90-day pause.