Why woeful US jobs data might spell higher inflation in the near future

The latest US employment figures were much worse than expected. And that matters not just for the US economy, but for global markets too – and for inflation in particular. John Stepek explains why.

The US jobs data came out on Friday. It was much worse than expected, so naturally, the stockmarket jumped. Why? And what does it all mean?

The monthly non-farm payrolls report has always been a very important economic data point – it shows what’s going on with unemployment in the world’s most powerful economy. If American citizens are unable to find jobs, they won’t spend money. If they don’t spend money, the world’s most powerful economy will weaken (US consumers drive something like two-thirds of economic activity in the US).

Why US employment matters to global markets

If the world’s most important economy gets weaker, it tends to have a knock-on effect across the rest of the world (note that something similar goes these days for China, which didn’t used to be the case). So US employment doesn’t just matter for American jobseekers, it matters for global markets. And so you tend to get a big reaction if the data is better or worse than expected.

Now, for a while during the pandemic, people stopped paying as much attention to the reading. In the early days, they knew it would be awful, and in the recovery phase, they knew it would be chaotic.

But we’re through that now, it seems. Investors now view a rapid US recovery as baked in. They now want to see confirmatory evidence of that in every economic data point, and when they don’t, they get a bit of a jolt. That’s what happened on Friday. Economists had expected employers to hire almost a million people last month. As it turns out, payrolls only grew by 266,000 jobs. Meanwhile the unemployment rate rose to 6.1% from 6%.

Don’t get me wrong – adding a quarter of a million jobs would historically be a very good reading for the US economy. But historically, the US economy has rarely been recovering from a global flu outbreak.

So that’s a big disappointment, however you read it. Naturally, the stockmarket rose sharply to record highs. Why? Well a duff reading like this means that there’s no chance the Federal Reserve, America’s central bank, is going to pack in the money printing any time soon. So investors lost some of their fears that the central bank might start to raise interest rates – or even talk about raising rates – in the near future, a spectre that Janet Yellen had raised just a few days ago.

One obvious result of lower interest rates for longer was that the Nasdaq – full of tech stocks that prefer low long-term interest rates – jumped after a tough week. But so did gold, which also benefits from the idea that interest rates will stay down (or more specifically, that “real” interest rates will fall).

Competing with stimmie and “stonks”

However, there’s a bit more to it than just “money printing forever, yee haw, etc”. The bull case for the stockmarket is predicated on a vigorous recovery. Yes, that’s a vigorous recovery accompanied by record-low interest rates and preferably as much money printing as possible. But if the economy loses steam, that’s not good news for stocks.

So what’s the underlying story here – if there is one? The assumption seems to be that the real issue for employment is that employers are having trouble competing with a combination of the big stimulus cheques being sent out to US households plus the increased benefits. Basically, people are getting paid so much not to work, that they don’t really feel keen to get out there.

Your own view on this will probably depend on your political opinions. My own feeling is that this is probably a factor at the margins. If you’re an older person with a career and dependants, is a boost in unemployment benefits enough to keep you from getting back to the office? Highly unlikely.

But if you’re a 20-something who previously worked a till at a coffee shop or in Walmart, and you’re now making more money daytrading “stonks” with “stimmie” cheques than you ever did doing that – are you itching to get back? I know what I’d be doing, and I’m guessing you do too. In any case, the margins are what matters a lot of the time in economics.

So let’s assume that this is either a one-off dud reading (which is often the case with non-farm payrolls data, despite its massive immediate influence), or that in fact, employers are genuinely struggling to find workers in the face of “stimmie”.

Long story short, that points to higher wages. You might think: “Well, stimmie cheques are going to dry up at some point”. But what if they don’t? There’s not a lot of sympathy out there for employers who don’t feel they can pay people enough to get them back in harness. Can’t pay enough to attract workers? Tough.

It’s a general extension of this sense that individuals have been sacrificed for too long to the interests of big companies and globalisation. The point is, the political calculus has changed. There are now more votes to be won in backing the idea that wages need to rise, rather than that “wealth-creating” companies need to be protected from “rapacious” unions.

Note that if you’re looking for some indication that this is indeed what’s happening, then this jobs report – weak as it was – also revealed that wages had risen by 3% year-on-year in the first quarter, which certainly doesn’t suggest that it’s a buyer’s market when it comes to labour costs. In other words, the inflationary story is intact, the politics still all point in that direction, and investors should allocate their money accordingly.

If you’ve not already subscribed to MoneyWeek magazine, you might want to do so as this is a big ongoing topic that we’ve been covering for a while now. Get your first six issues free here.


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