Markets sold off because Friday’s payrolls report handed the Fed a permission slip it may not be ready to use wisely.
KEY TAKEAWAYS
The headline payrolls number was much stronger than expected, with 172,000 jobs added versus expectations for 88,000. That strength gives the Fed more room to sound hawkish, which markets did not love.
The job gains were extremely concentrated. Leisure and hospitality, local government, and healthcare accounted for 160,000 of the 172,000 jobs.
White-collar sectors remain under pressure. Financial activities lost 22,000 jobs in May, and technology payrolls have also been soft.
Long-term unemployment is quietly becoming a bigger problem. The share of unemployed Americans out of work for 27 weeks or more rose to 27.5%, up from 20.4% a year ago.
The Fed faces a difficult setup. Holding rates may not fight oil-driven inflation, but hawkish language could pressure yields, stocks, borrowing costs, and already fragile consumers.
MY HOT TAKES
The labor market is not breaking in the traditional way. It is freezing, with fewer people losing jobs but more displaced workers struggling to get back in.
The payrolls headline gave investors the wrong kind of comfort. A strong number with narrow breadth can be more dangerous than a weak number everyone understands.
The Fed has been handed a permission slip, not a mandate. Using it too aggressively could turn consumer anxiety into real economic pain.
AI is likely reshaping the labor market faster than the headline data can explain. Entry-level and white-collar workers may be feeling the squeeze before the macro numbers fully admit it.
The biggest risk is not Friday’s jobs report itself. The risk is that policymakers respond to the surface strength while missing the stress underneath.
You can quote me: “This was not a broad-based jobs boom. It was the Magnificent Three problem hiding in plain sight.”
Good bad news. The old "good news is bad news" scenario was quite apparent in the wake of last Friday's blowout payrolls number. Minutes before the report came out last Friday at 8:30 AM Wall Street Time, I lamented to a journalist that the most likely scenario for the monthly jobs number was for Nonfarm Payrolls to come in on expectations at 88k adds. I worried that at that level, the number could offer us–or more importantly–the Fed very little in the way of information about the labor market. This "status quo" number would turn the estimates of Fed posture over the very critical, next three FOMC meetings into a coin toss. Coin tosses leave the markets lost, like a rudderless ship in a storm.
My followers know that I have mixed emotions about the current state of the labor market. While on the surface the jobs situation seems stable, the headline rate is not as low as it has been, but it is not quite hot enough to call the situation bad. Looking below the headline number, we observe many signs that this is a labor market that is in the midst of great change, leaving many would-be workers either giving up on job searches or accepting part-time or jobs that they are overqualified for. We see layoffs in the headlines, but they are not showing up in the unemployment numbers. Is it that the laid-off are being replaced so quickly that the headline numbers reflect a healthy labor market? Well, if that's the case, then–despite the suffering of laid-off–the labor market is healthy. The JOLTS Job Openings number that we got last week certainly supports that thesis with vacancies also topping economists' estimates.
The thesis that I have been sharing with you for some time is that the makeup of the labor force is actually going through a massive transition, largely spurred on by AI. Younger, less-experienced workers are finding it tougher to find entry level jobs as employers lean on AI to make existing workers more productive. There is also evidence that folks who have jobs are nervous, with the quit rate declining. In a strong labor market the quit rate is high because workers are confident that better opportunities are a-plenty. I didn't make that up, it is a well-documented relationship. We can also find some interesting narratives in the makeup of hires and fires. For example, layoffs have been prevalent in technology and financial activities with the slack being picked up by other sectors like healthcare and hospitality. Those sectors are growing so quickly that the growth masks the pain felt in the traditional "white collar" groups.
"So what," is a reasonable question to ask. The Nonfarm Payrolls number printed a blowout 172k jobs–far more than the expected 88k–and the Unemployment Rate came in as expected at 4.3%. That, on the surface, would hardly present as an unhealthy labor situation. That's true. On the surface, the print, for all intents and purposes, gave the Fed a free pass to do with rates what it pleases. Solid employment, solid economy–raise rates to tackle nasty inflation. Yes, employment looks solid on the surface. But if you agree with my thesis that the labor market is in flux, you would also agree that there is a high degree of anxiety brewing. That is supported by the recent spate of abysmal consumer sentiment numbers we have been getting. That, my friends, is what has me on the edge of my seat. If all this pent-up anxiety begins expressing itself in a slowdown in consumption–70% of GDP–we can find ourselves in a bit of a mess. If we throw in a dash of Fed rate-hike talk, or worse actual rate hikes–mess becomes mayhem really quickly.
Here is the surface story. Based on headline numbers, inflation is high, the labor market looks strong, and stocks–notwithstanding Friday's messy session–are near all-time highs. The Fed was already showing signs of a propensity for a hawkish pivot even before its known-hawk, new Chair was sworn in a few weeks ago. We are quickly barreling into the June FOMC meeting with this very setup. Will we get a hike? Futures estimate a less than 3% chance at next week's meeting. According to futures, the most meaningful probability of a hike comes later this year–markets are now assigning better than even odds of at least one hike by December, a number that was barely a rounding error just a few months ago. All of those probabilities resulted in Friday's market selloff. Any suggestion by the FOMC next week supporting that hawkish narrative can be–well, painful. Any continuation in last week's selling pressure can also hurt already fragile consumer confidence.
Now let me tell you what the headline number isn't telling you. Because the blowout of 172k was not, by any measure, a broad-based surge. Peel back one layer and you find that three sectors –leisure and hospitality, local government, and healthcare–accounted for 160,000 of those 172,000 jobs. Everything else in the entire private economy combined produced barely 12,000 adds. I call this the "Magnificent Three" problem, and it matters enormously for what comes next.
Leisure and hospitality alone added 70,000 jobs in May–nearly five times its average monthly pace over the prior twelve months. Within that, food services and drinking places drove 48,000 of those hires. Some analysts are pointing to a likely World Cup effect, with the US hosting matches this summer and venues staffing up accordingly. If that's the case, that particular tailwind reverses cleanly in the coming months, and we should expect a significant giveback in that sector's numbers. Local government contributed 55,000–mostly non-education municipal employment, which is the kind of hiring that rarely accelerates a private-sector economy. Healthcare added a steady 35,000, right in line with its recent monthly average. Fine, but also not a growth engine for the broader economy in the traditional sense.
Meanwhile, financial activities shed 22,000 jobs in May. That brings the sector's cumulative losses to 107,000 since its employment peak just one year ago, with insurance carriers and commercial banking doing the heaviest bleeding. Technology payrolls have been similarly soft for months. The white-collar professional economy–the sector that historically drives consumer spending on big-ticket items, second homes, and investment accounts–is not growing. It is contracting. If you're wondering why consumer sentiment is at record lows even while the headline unemployment rate holds at 4.3%, the answer lives in that gap.
Which brings me to the number nobody is talking about. The share of unemployed Americans who have been out of work for 27 weeks or more–what the BLS calls the long-term unemployed –has climbed to 27.5% of all unemployed, up from just 20.4% a year ago. That is a cycle high, and it tells a very different story than the headline unemployment rate. The people who have jobs are keeping them. The people who have lost jobs are getting stuck. The low short-term unemployment number is not evidence of a healthy labor market reabsorbing displaced workers quickly. It is evidence of a labor market that has stopped firing and largely stopped hiring, with a growing underclass of people who have been searching for months and are running out of road. The broader U-6 measure–which captures discouraged workers and those stuck in part-time work against their will–sits at 8.1%, nearly double the headline rate.
The University of Michigan's Consumer Sentiment Index landed at 44.8 in May, a record low, its third consecutive monthly decline. Year-ahead inflation expectations rose to 4.8%. Long-run expectations climbed to 3.9%. Over half of all survey respondents–some 57%--spontaneously cited high prices as the primary force eroding their personal finances. The Strait of Hormuz and the energy price pressure it is producing are not abstract geopolitical events for these people. They are felt at the gas station, the grocery store, and the kitchen table. And that anxiety is accumulating quietly in a labor market that looks calm on the surface but is anything but calm beneath it.
Here is where the "good news is bad news" problem becomes a "no good options" problem for Kevin Warsh walking into his first FOMC meeting as chair next Tuesday. A hold--virtually certain at greater than 97% probability–does nothing to address inflation that is being driven by oil and supply disruptions, not by demand that rate policy can easily reach. But any language in the June statement or dot plot that suggests hikes are on the table–and the futures market is already pricing better-than-even odds of one by December–will hit Treasury yields, compress stock multiples, and apply yet another layer of pressure on a consumer who is already cracking at the edges. The 10-year Treasury finished Friday above 4.54%. The 30-year crossed back above 5%. Those are mortgage rates and corporate borrowing costs, and they are being felt in real time.
I want to be clear about what I am not saying. I am not saying the economy is about to collapse. I am not saying the jobs market is fraudulent. What I am saying is that the headline number handed the Fed a permission slip it may not be ready to use wisely, in a consumer environment that is far more fragile than the equity market near record highs would suggest. The real risk is not the number itself. The real risk is what happens when a labor market frozen in suspended animation finally gets pushed in one direction or the other–by a Fed that has to choose between fighting inflation and protecting a consumption-driven economy that is running on increasingly thin ice.
That's the uncomfortable reality hiding behind Friday's blowout. The labor market is not falling apart. It is quietly, methodically tightening its grip on the people who need it most–while giving the headline readers little to worry about. Until, of course, they have everything to worry about. I was worried about a number coming in on expectations. I wasn’t even fathoming a blowout number, which is far-more worrisome than my expectations. The ball is back in the court of the Fed. Will it look below the surface or respond to the surface prints. Don’t miss this week’s inflation numbers. They can change the direction of this narrative quickly if they can. They can, but given the unchanged state of the energy markets, well…well, let’s just see what we get. Until then, stay focused and remember–long-term focus always wins.
FRIDAY’S MARKETS
The blowout May jobs report triggered a broad selloff on Friday, with the S&P 500 dropping 2.64%, the Dow losing 695 points, or 1.35%, to settle at 50,866, and the Nasdaq suffering its worst session since April 2025, falling 4.18%, led by a violent sell-off in semiconductor shares. The 10-year Treasury yield surged roughly 6 basis points to 4.54% as markets repriced the likelihood of a Fed rate hike later this year, while the 2-year yield climbed approximately 10 basis points to 4.16% and the 30-year crossed back above 5%. WTI crude oil fell toward $91 per barrel as investors weighed signs of progress in negotiations against continued uncertainty over the Strait of Hormuz. Friday's session snapped the S&P 500's nine-week winning streak.
NEXT UP
No major releases today, but later this week we will get housing numbers, Consumer Price Index / CPI, Producer Price Index / PPI, and University of Michigan Sentiment. Don’t forget earnings! We still have a few big ones in the days ahead. Don’t miss a beat–make sure you check back in daily.