The Middle East is in continuous conflict. How much longer can the US non-farm data hold up?

Behind an eye-catching employment report, a more troubling issue is lurking.

The U.S. Department of Labor’s March nonfarm employment data released on April 4 appears to offer the market some reassurance—yet the shadow of war and a structural decline in employment are making this comfort increasingly fragile.

Nonfarm payrolls added 178k jobs in March, the largest increase in nearly 15 months. It reversed the February decline of 133k after revisions, and the unemployment rate also fell back from February’s peak to 4.3%. When the data came out, the market briefly let out a sigh of relief.

However, the decline in the unemployment rate is not driven by a surge in job opportunities. The real situation is that nearly 400k Americans exited the labor force last month. When jobs get harder to find, people simply choose to give up.

Labor economist Guy Berger poured cold water directly: “Nobody is talking about the job market re-accelerating anymore.”

Average figures reveal the real temperature

Big swings in single-month data conceal the true pace at which the job market is operating.

Combining February and March and averaging them out, the monthly average increase in jobs is only about 22.5k—this is the baseline that is closer to reality.

A deeper crisis is that in March, the U.S. labor force participation rate fell to 61.9%, the lowest in nearly five years. If you strip out the interference from the pandemic, this figure is even the lowest since 1976 (when women began entering the workforce on a large scale). PNC Financial Services’ chief economist Gus Faucher noted that aging and recent restrictions on immigration are causing labor supply to keep shrinking.

Another detail worth watching: the year-over-year wage growth rate for non-management workers has fallen to 3.5%, the lowest level since the reopening five years ago. Slowing wage growth means the support for consumers’ purchasing power is weakening.

An unhealthy “low hiring, low layoffs” balance

The current U.S. labor market has an extremely contradictory feature: hiring motivation is missing, but companies also are unwilling to lay off workers.

The data show that over the past year, the health care industry has been almost the only hiring engine. Outside of health care, other economic sectors are bleeding jobs. Over the past 12 months, the U.S. economy generated only 327k jobs, far below the usual 1 million to 2 million range in prior years.

“Hiring is at a low level, but layoffs are also at a low level.” Fifth Third Bank’s chief economist Bill Adams explained. The four-week moving average of initial jobless claims fell to 207k, the lowest level in history. This “not hiring and not firing” condition has been described by economists as the “low hiring–low layoffs” pattern, sustaining a delicate and fragile balance.

The Hormuz shock: This time is different

In recent years, the U.S. job market has gone through an aggressive interest-rate hiking cycle, a regional bank crisis, and tariff shocks—each time, “bending but not breaking.”

But according to The Wall Street Journal, this time the Iran war has led to the closure of the Strait of Hormuz, and the nature of the shock to global energy supply chains is different.

Economists at the Federal Reserve Bank of St. Louis estimate that if oil prices remain at their current levels, the extra quarterly spending by consumers on fuel would be equivalent to offsetting 10% to 50% of the tax cuts implemented by Trump last year.

The logic is straightforward: every dollar that goes into the gas tank is one less dollar going to restaurants, retailers, and the services sector—industries that make up the core of U.S. employment.

Meanwhile, rising bond yields have pushed the 30-year mortgage rate back from 6% to about 6.5%. The previously hoped-for boost to a housing recovery and employment in construction now looks less promising.

Consumers have little buffer left

The energy shock triggered by the 2022 Russia-Ukraine conflict was absorbed by consumers, who relied on excess savings accumulated during the pandemic.

This time, things are different.

Citi’s chief economist Nathan Sheets said that consumers’ savings buffer has basically been exhausted, and combined with slowing wage growth, families’ ability to absorb higher prices has dropped sharply. He said, “What can bring them down is a significant deterioration in the job market.”

Sheets compares the current job market to an athlete in peak training—years of absorbing shocks have made companies leaner and more adaptable. But Skanda Amarnath, executive director of the economic policy think tank Employ America, characterizes the current job market more cautiously, calling it “robustly soggy”—“slow for a long time, but not broken yet.”

Guy Berger put it bluntly: “2022, 2023, 2024, and 2025 have made me realize that things continue to worsen at an extremely slow pace—it is not impossible.”

The Fed faces a dilemma

The resilience of the job market has not made the Federal Reserve’s situation any easier.

Before the outbreak of war, several Fed officials still expected rate cuts this year. Now, more officials have said that interest rates could remain unchanged indefinitely.

In a blog post dated April 4, San Francisco Fed President Mary Daly wrote: “It’s not easy to communicate zero job growth to the public while being consistent with full employment.” She also warned that the ceiling for economic growth has moved down, and the risk of misjudging interest rates being too high or too low is rising.

The Fed’s core contradiction is that it has spent five years explaining to the public that “high inflation is temporary,” and every new supply shock makes that narrative harder to sustain. If it keeps rates high to fight inflation, the job market may face pressure; if it cuts rates to protect jobs, inflation expectations could get out of control.

PGIM’s chief global economist Daleep Singh laid out two scenarios: if both sides reach a decent ceasefire, oil prices could fall back to $80 to $100 per barrel; if the conflict escalates, supply-chain disruptions would drag growth down, far beyond the duration of the fighting itself. In that case, the Fed would find it even harder to buffer an economic downturn through rate cuts.

How things end depends, to a large extent, on how long the war lasts.

Risk disclosure and disclaimer

        There are risks in the market; investment should be approached with caution. This article does not constitute personal investment advice, and it does not take into account any individual users’ special investment objectives, financial conditions, or needs. Users should consider whether any opinions, viewpoints, or conclusions in this article align with their specific circumstances. Invest at your own risk and responsibility.