Clawing Back

The April jobs report surprised to the upside, with nonfarm payrolls increasing 177,000, beating the forecast of 138,000. Moreover, the unemployment rate held steady at 4.2%. This presents a picture of an economy that was resilient in the face of the general state of uncertainty during the month of April. It also corroborates the relatively stable weekly and continuing unemployment claims data, revealing a jobs market that has not deteriorated meaningfully despite the worrisome headlines and the steep drop in business confidence.

Maintaining a healthy labor market is the key to growth of the U.S. economy: With solid jobs growth reported, we can anticipate still-solid consumer spending. Fully employed households spend labor income, and the recent data from Visa confirms that U.S. households continue to spend. That said, the jobs data flies in the face of the more dour outlook presented in the recent April manufacturing Purchasing Managers Index (PMI), where significant concern related to trade policy was translating into significant uncertainty: One would posit that this would be reflected in a more defensive posture from U.S. businesses, but we don’t see that in these jobs numbers — yet. The true impact of the trade uncertainty may be to come, and we do anticipate a weakening outlook as we head into the summer, including a weaker jobs market. Although a U.S. recession is not a foregone conclusion, the probability has increased.

Labor Force Participation improved in the April jobs report, with prime age (25-54 years old) participation posting the best levels of 2025. 83.6% of the labor force in that age cohort is working, and this statistic has been on an upward trajectory since 2020 and is back to levels we have not seen in 20 years. This is very good news, but there is still room for improvement: the labor force participation rate of men has remained lower in this post-Covid era, running at roughly 68% today vs. over 69% post-Covid, and nearly 75% in the early 2000s.

There are several factors noted in this precipitous fall: a decline in middle skill jobs (as the economy has shifted from manufacturing to services, and technological advancements have reduced the demand for middle skills jobs vs. high skilled labor); a steep decline in labor force participation across less- educated men (where men with a high school degree or less have been pushed out of the labor market); and rising disability and illness, with 39.5% of prime age men not in the labor force citing this as the primary reason. Creating economic opportunities for prime age men will be increasingly important going forward as the U.S. economy will rely on a growing labor force to support economic growth in the absence of working age population growth and robust immigration. 

U.S. equity markets have reacted positively to the jobs data, and it seems recession risk has subsided — at least for now. With many anticipating deterioration in the labor market, the payrolls beat points to a resilient economy, particularly in the context of a generally positive corporate earnings season and deescalating trade tensions. According to FactSet, the blended earnings growth rate for Q1 has risen to nearly 13% from just over 7% at the end of the quarter, with earnings surprising to the upside by 9% so far in this reporting season. Importantly, we have not heard plans for widespread layoffs from corporate CEOs. Further, the upside surprises from Meta and Microsoft helped to alleviate concerns about the spending environment for artificial intelligence, and reflected a renewed and positive focus on AI monetization. 

U.S. Treasury yields rose in the wake of the upside surprise to payrolls as investors have lightened up on recession bets and have modified expectations for Federal Reserve rate cuts. With a resilient jobs market reflected in the “hard data” and a data-dependent Fed, the odds for four rate cuts in 2025 — which was priced into the market on Thursday — have fallen to three cuts.

We have been steadfast in our expectation for three rate cuts this year under the premise that the economy would slow enough toward the second half of 2025 to justify easing monetary policy. The wildcard remains inflation: An inflationary shock due to tariff impacts may force the Fed to wait. If that does happen, we can anticipate that rate cuts will come later in the year and be more aggressive as we head into 2026.