Why hiring surged in May despite economic strain from the Iran war

Key Concepts

• Labor Market Momentum: The current state of job growth, characterized by consistent monthly gains despite broader economic anxieties.
• Underemployment: A condition where workers are forced into part-time roles instead of full-time positions, or have become discouraged from seeking work.
• Service Sector Inflation: Price increases driven by high demand in the service industry, particularly leisure and hospitality.
• Wage Erosion: The phenomenon where inflation outpaces wage growth for the bottom two-thirds of income earners.
• JOLTS (Job Openings and Labor Turnover Survey): A key metric used to track labor market health, specifically the "quit rate."
• Monetary Policy: The Federal Reserve’s approach to interest rates in response to inflation and employment data.

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1. Labor Market Performance and Data

The latest jobs report indicates surprising strength, with 172,000 jobs added last month. This marks the third consecutive month of growth. Furthermore, data for March and April were revised upward by 93,000 jobs, and the unemployment rate remains steady at 4.3%. Kevin Hassett, Director of the White House National Economic Council, characterized this as a market "hitting on all cylinders."

2. Structural Disparities and "Under the Hood" Analysis

Diane Swonk, Chief Economist at KPMG, provided a nuanced critique of the headline numbers:

• Upside Drivers: A significant portion of the growth (over 50,000 jobs) was attributed to local government hiring.
• Sector Concentration: Gains were heavily concentrated in the service sector, specifically leisure and hospitality.
• The "Undercurrent": Despite headline growth, there is an elevated number of underemployed and discouraged workers. The duration of unemployment is rising, and the unemployment rate for new college graduates remains high, comparable to levels seen in the early 2010s.

3. Wage Growth and Inflationary Pressures

A significant disconnect exists between different income strata:

• Top 3% of Earners: Seeing wage growth that outpaces inflation, fueling discretionary spending in the service sector.
• Bottom 2/3 of Earners: Experiencing wage erosion, where purchasing power is falling below the rate of inflation.
• Inflation Outlook: CPI for May is expected to exceed 4.2%. Swonk notes that the spending by the top 3% is contributing to "sticky" service sector inflation, which acts as a regressive tax, exacerbating inequality.

4. Labor Market "Thaw" vs. "Freeze"

While the market is not in a total freeze, it is not fully fluid either:

• Quit Rate: According to the JOLTS data, the quit rate fell to its lowest level since August 2020. This indicates that workers are hesitant to leave their current positions, and the "premium" for job-hopping has narrowed.
• Worker Sentiment: Employees are "clinging on" to existing jobs, while those outside the market struggle to gain entry.

5. Federal Reserve Policy and Interest Rates

The discussion highlighted a shift in consensus regarding interest rates:

• Policy Direction: Despite pressure from the President to lower rates, the consensus among Fed leadership—now under Kevin Warsh—is leaning toward the necessity of hiking rates.
• Rationale: Swonk argues that the Fed must "derail" entrenched inflation to achieve a healthy labor market where "all boats rise with the tide."

6. Data Integrity and Bureaucratic Capacity

Addressing concerns regarding the firing of the head of the Bureau of Labor Statistics (BLS), Swonk maintained that the current data remains reliable. However, she highlighted a critical operational risk:

• Staffing Shortages: Federal agencies have lost 350,000 workers since October 2024 due to firings, retirements, and quits.
• Impact: Federal employment is at its lowest level since 1966, which threatens the quality and capacity of statistical agencies to produce accurate economic data.

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Synthesis and Conclusion

The labor market is currently defined by a paradox: while headline job growth is robust, the underlying health of the economy is fragile. The growth is driven by a minority of high-wage earners, while the majority of the workforce faces declining purchasing power. The Federal Reserve faces the difficult task of curbing inflation—which is currently acting as a regressive tax—without triggering a broader economic downturn. Furthermore, the erosion of institutional capacity within the BLS poses a long-term risk to the accuracy of the economic data upon which these critical policy decisions are based.