Jobs week arrives as inflation, AI layoffs, and consumer stress challenge the Fed’s view of a healthy labor market.
KEY TAKEAWAYS
The Fed’s dual mandate exists for a reason: affordable necessities and income opportunity are the foundations of social and economic stability. History gets ugly when bread gets expensive and jobs disappear.
Headline unemployment still looks manageable at 4.3%, but the surface data may be hiding real labor-market stress. Announced job cuts, hiring slowdowns, and AI-related efficiency gains are the warning signs.
AI may not be “evil,” but it is changing how companies think about workers. Even when companies do not fire people outright, they may delay hiring and allow attrition to do the cutting.
Last week’s Kroger example shows that consumers are reacting to high prices in real time. When even employed people are talking about food banks, the headline data is not telling the whole story.
The Fed is unlikely to cut rates soon, and markets are even pricing in the possibility of hikes later. That could create more pressure on consumers already dealing with inflation, weak wage growth, and fragile job prospects.
MY HOT TAKES
The labor market may be less healthy than the unemployment rate suggests. A 4.3% print can look fine on a Bloomberg terminal and still feel terrible at the grocery checkout.
AI’s labor impact is probably showing up first in hiring behavior, not mass unemployment. That makes it harder to measure and easier for economists to dismiss.
The Fed is stuck between two bad optics: ignore inflation and look reckless, or stay restrictive and squeeze consumers harder. That is not a dual mandate; that is a policy hostage situation.
Consumer anecdotes matter because they often show stress before the official data catches up. Wall Street loves clean data, but real life usually arrives messy and badly formatted.
Kroger cutting prices recently is not just a retail story. It is a consumer distress signal with fluorescent lighting and discount tags.
You can quote me: “A 4.3% unemployment rate can look healthy on paper while consumers are quietly drowning at the grocery store.”
Eye of the beholder. What do you suppose are the two most important things for a government to be on top of? When I say government, don’t think narrowly–think broader like kings and queens, or village elders, or even emperors. I added that last sentence to broaden your perspective so much that my point will be obviously universal.
Ok, that’s out of the way, now we can get back to the question. But wait, before we do, I want to add a bit of flair to the question to underscore the importance even more. If you are a leader of people, what two things are most likely to cause you to have your head removed from your body? Well, I am just going to answer it while you laugh at my question. I would say keeping prices for necessities affordable and providing lots of opportunities to earn income. I boiled down the options to those as revolutions have started over rising bread prices and high unemployment. Think French Revolution, or The Arab Spring, or the collapse of Weimar Germany, or even the February Riot in Petrograd Russia that led to the Bolshevik revolution. There are so many more, but all of these turning points in history ended, well–let’s just say–not on a positive note. That first one led to one of my very distant relatives losing her head for suggesting cake as a substitute for expensive bread. In fact many more of my distant relatives and even some close ones lost heads and more in all those others as well. So, yeah, it’s kind of important to make sure unemployment is not rampant and that life necessities remain affordable.
You may not be surprised that those two very basic important attributes make up the Fed’s dual mandate: full employment and stable prices. If nothing else, but to prevent utter tragedy. But let’s get real for a moment. Those two things are on two ends of a very delicate balance. Low unemployment causes inflation, high unemployment causes inflation to abate. The idea there is that you need a job to buy stuff. If there are lots of jobs available you are more likely to be employed and you will have confidence to spend lots of money, which leads to inflation. If that inflation gets too rampant, you can’t afford to buy things, and when you stop, companies’ earnings suffer and they lay off workers. High unemployment is a pretty good leading indicator for disinflation (that’s a slowing of inflation).
So, why the elaborate set up on what should be obvious? Well, it’s jobs week, and all eyes will be on the health of the labor market. But, it’s no ordinary jobs week. A new Fed Head just took the corner office and he inherited a bit of an inflation problem. That inflation problem has manifested itself in some pretty nasty economic number prints over the past few weeks. You don’t need to even follow the numbers to know that inflation is a problem. You just need to fill your car up with gas or even notice the numbers on your local gas station’s sign. You can see it in your grocery bill, your rent, your insurance premiums–it’s everywhere. On the employment front, the labor market appears to be healthy. 4.3% unemployment is not considered high compared to history, which is probably why so many Fed officials say confidently that the labor market appears healthy. But is it?
I don’t want to get into the weird way in which labor market numbers are reported, calculated, and amplified by the mainstream media. But we do know that something is going on beneath the surface. We see announced job cuts hitting record highs and we also read headlines that companies are laying off workers. And yet the unemployment rate seems manageable. Many companies have cited Artificial Intelligence efficiencies to justify layoffs. There it is! AI. Many companies have actually cited AI behind layoffs, but still there are many really smart folks who state that AI has nothing to do with job cuts. In fact they state that AI is creating many new jobs. I won’t name any names of renowned Wall Street chief economists who have recently gone on record to say as much. I vehemently disagree. If you think hiring managers are not taking into account AI efficiencies when they hire, you are fooling yourself. They certainly are. Why would a company hire 5 workers when AI can enable 3 workers to do the same job? Better yet, why would a company hire any new workers before it could realize the full efficiency of its existing workers–simply stop hiring and let natural attrition take over. Let me bring this all together for you.
Last week I wrote about Kroger–the largest US Grocery chain–cutting prices because it was losing customers due to grocery prices being too high. My video on the topic struck a chord and the viewer response was robust and full of anecdotal data that simply can’t be ignored. I took a screenshot of one viewer’s response:
“Many of us are now considering going to food banks. I’m struggling to feed my cat and myself. I work a full-time job. I have two college degrees. I am in my 50’s, so I can’t just go find another job because a lot of people like to say because they discriminate against older workers. Also, there’s now going to be AI taking away even more jobs…it’s also younger people are having trouble finding jobs too. A lot of them are saddled with high college debt…”
Is any of that untrue? That viewer is employed, so he is not adding to the unemployment rate. Inflation is now growing faster than wage growth, according to the most recent economic releases. Many folks have simply stopped looking for jobs which skews the headline unemployment rate as well. A few tech companies have announced job cuts citing AI, but many more intentionally leave out the AI part. As mentioned above, companies may not be laying off employees because of AI, but they are certainly curbing their hires if not partially but completely. To be clear, AI is not evil. Its ability to amplify productivity is a fact, just like the railroad, steam shovel, and PC revolutions before it. The composition of the labor force is changing, but on the surface, it may seem healthy. What needs to be closely watched is the discomfort of consumers like my viewer above. Not only is he unable to afford necessities, but he is struggling to find additional work, and he sees a whole generation of younger folks struggling to get jobs. Will this affect his consumption patterns? Well, I think you know the answer to that question.
So, what I want you to take away from this blogpost/newsletter is this. In a week where we are about to be inundated with lots of employment data, you need to remember that what appears on the surface–the headline numbers–may not necessarily reflect what is happening below the surface. And what happens there is what will ultimately manifest itself in a slowdown of economic growth if left unrecognized.
That brings me back to the Fed. The FOMC will meet in two weeks and decide on policy. It appears highly unlikely that the Fed will lower interest rates at that meeting. On the contrary, the market–based on Futures–expects HIKES to be more probable in the months ahead with an over 50% chance of a hike in December. How might a restrictive monetary policy affect my viewer above? Will he accept cake in lieu of affordable bread? Side note: historians have refuted Marie Antoinette’s “let them eat cake” line as being historically inaccurate. Economists expect the unemployment rate to remain unchanged at 4.3% this Friday. The Fed has referred to that as being healthy in the past; that is historical fact.
FRIDAY’S MARKETS
All three major indexes closed at fresh record highs Friday, with the Dow up 0.72%--above 51,000 for the first time–while the S&P 500 added 0.22%, and the Nasdaq rose 0.2%. The S&P 500's gain marked its ninth straight winning week, its longest streak since 2023. Dell led the move, surging roughly 33% in its best day on record after a top- and bottom-line earnings beat and raised guidance, fueling the broader AI trade. For the month, the Nasdaq jumped about 8%, the S&P 500 gained 5%, and the Dow rose 3%.
NEXT UP
ISM Manufacturing (May) may have inched higher to 53.0 from 52.7.
Construction Spending (April) probably increased by 0.2% after expanding by 0.6% in March.
Later this week: more earnings in addition to JOLTS Job Openings, ADP Employment Change, ISM Services, Fed Beige Book, Unemployment Rate, and Nonfarm Payrolls. Make sure you check in daily for what the Street is expecting.