Labour Market Monitor: April’s NFP Reflects Old Trade Regime

Summary

• April’s NFP do not tell us much about the new trade regime because the data was collected before the bulk of the tariffs were in effect.
• NFP were 177k, above consensus’ 138k.
• Migrant workers continued adding to labour supply as deportations are running below FY2024, but the long-term goals of immigration policy remain unclear.
• Unemployment and most measures of labour market utilisation were unchanged and show full employment.
• Real wage growth accelerated due to lower energy prices, but the tariff impact is likely to swamp those effects.

Market Implications

• I expect the Fed to cut six times in 2025, starting with a risk management June cut, against markets pricing three cuts.

NFP Above Expectations

April’s payrolls were 177k, above consensus’ 138k, though March’s were revised down by 43k to 185k (Table 1). Sam’s model had predicted a positive surprise.

Strong Labour Demand When Tariffs Struck

April’s NFP was collected under the old trade regime. In April, most of the tariff increases were still to come. Based on the daily Treasury cash flows, April’s average effective tariff was about 4.5%, set to rise to about 25% based on latest policy announcements. Also, the survey week (12-16 April) came too soon after the tariff announcements for employers to react.

Friday’s data surprised on the upside and made an upward trend more discernible:

• Six- and three-months averages were up (Chart 1).
• Total NFP remained driven by private services, with public employment contracting by 9k and manufacturing employment practically unchanged. The new trade regime stands to hit manufacturing employment hardest.
• Employment increased by 436k in the HH survey and by 26k in the HH survey adjusted for payrolls definitions (Chart 3). HH survey employment estimates remain biased downward by the Census Bureau underestimating immigration.
• Net hiring in the JOLTS survey (= hires-quits and layoffs) remained aligned with 2019’s average (Chart 4). Gross labour market flows (hires, layoffs, quits) have fallen, which I think reflects employers’ efforts to limit turnover, following the pandemic labour shortages.
• April’s average weekly hours and total hours worked were above March’s (Chart 5). AWH remain well below pre-pandemic, but this largely reflects stronger preferences for part-time work (Chart 6).

Migrant Workers Still Adding to Labour Supply

Migrant workers continue adding to labour supply:

• In April, the labour force increased by 528k or 30bp (Chart 7).
• This largely reflected a 10bp increase in the participation rate. Participation is sliding long term (Chart 8).
• Share of migrants in the labour force remains stable, though it is likely undocumented migrants remain undercounted. NFP remain well above numbers that would be accounted by native-born Americans alone (Chart 9; see Are sub-100k NFPs The New Normal?)
• This likely reflects that, while inflows of illegal migrants have stopped, deportations are still 10% below FY2024 levels (Chart 10). Congress intends to allocate more resources to immigration enforcement, but this is unlikely to impact deportations until Q4. It is also unclear what the Trump administration’s immigration goals truly are.

Full Employment When Tariffs Struck

The labour market remained at full employment in April with strong demand and only a limited supply increase:

• Unemployment remained at 4.2%, a historically low number (Chart 11). Employment-to-population ratios were roughly unchanged and remain near post-pandemic highs
• Unemployment claims have remained stable, with few claims from federal employees so far (Chart 12).
• Spread between minorities and white unemployment remained near or below 2019’s average (Chart 13).
• Unvoluntary part-time work fell 10bp and remained near 2019’s average (Chart 14).
• Share of unemployment accounted for by labour market entrants or re-entrants remained stable, a sign jobs are abundant enough to make it worthwhile looking for one (Chart 15). The share of unemployment accounted for by job leavers has been falling since the pandemic, which could reflect efforts by employers to lower turnover (Chart 15 and Chart 4).
• Share of temporary layoffs has decreased which could also reflect employer efforts to increase employee retention (Chart 16).
• JOLTS ratios, unemployment and hires relative to vacancies increased, but remained near 2019’s average (Chart 17).
• Unemployment duration remains near 2019’s average (Chart 18).

Real Wage Growth Accelerating but Not for Long

Slowing energy prices and headline inflation brought about a moderate acceleration in real wage growth despite slower nominal wage growth:

• April’s nominal wage growth at 20bp was 10bp below expectations. Nominal wage growth has been around 4% for about a year (Chart 19).
• With slowing headline inflation, real wage growth has been accelerating. Assuming consensus April CPI, real wage growth will reach 1.4% YoY, up from 0.8% YoY a year ago (Chart 20).
• Trump administration wants to see faster real wage growth for lower income Americans. However, lower wage growth has been slowing relative to higher wages (Chart 21).
• Tariff increases are likely to cause a slowdown in real wages because nominal wages adjust more slowly than prices. In turn, this is likely to translate into slower real wage income and eventually slower household demand. Because consumer spending on core goods is about 10 times larger than energy spending, it is unlikely lower energy prices can fully offset the impact of the tariff hikes on real income.

Market Consequences

Last week’s data does not change my economic or Fed views. I still expect a recession of median severity with around 60% probability, a severe recession or no recession with 20% probability each.

My case for a median severity recession rests on:

1. Continued exceptional uncertainty and an adverse business environment driving higher private sector savings.
2. A decline in real household disposable income driven by the tariff hikes and aggravated by tougher student loan collections.
3. A manufacturing recession.

April’s NFP does not bring much additional information on the impact of the tariffs since the information was collected before the bulk of the levies were in effect. By contrast, the GDP data conveyed downside economic risks because it reflects tariff frontrunning that is likely to get unwound in Q2 or Q3.

Also, the tariff relief for consumer electronics and automotive imports does little to change the macro-outlook because its impact on uncertainty and an adverse business environment is negligible.

I could be wrong if, for instance:

• The ongoing bilateral trade negotiations become an off-ramp to a credible, simpler and more benign trade regime.
• A lower court or the Supreme Court ruled President Trump recourse to the IEEPA is unconstitutional. In such an instance, Trump would need Congress to vote for his tariff increases, which could prove difficult. However, such a ruling could turn into a constitutional crisis.
• Congress delivered a fiscal stimulus though this would raise the risk of a funding crisis and deeper recession, which I still see around 20%.

Therefore, I still expect the Fed to cut about six times in 2025, starting with a 25bp June cut for risk management. By contrast, markets are now pricing 3.2 cuts, down from 3.7 cuts before the NFP. I struggle to see how data that reflects the old trade regime could sway the Fed.

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