It's changed—The debate over whether U.S. employment is "good or bad"

1. The Impact of the Declining Breakeven Employment Growth Rate on Employment and Profitability

Since the second half of last year, the United States has experienced significant fluctuations in non-farm employment additions, with monthly figures often negative, and occasional better-than-expected results, such as in the past two months, while the unemployment rate has remained roughly stable at around 4.3%. A correct understanding of this divergence and volatility, as well as an assessment of the US labor market, requires a benchmark, which is the breakeven employment growth (breakeven employment growth), and this has been a key focus of recent Federal Reserve research.

Breakeven employment growth, i.e., the net new jobs needed each month to keep the unemployment rate stable. From a conceptual standpoint, breakeven employment growth = population growth × labor force participation rate × (1 – @E1@ target unemployment rate). The core estimation challenges are: first, estimating net immigration, which affects population growth and has been heavily impacted by Trump’s significant tightening of immigration policies—this is the most important factor influencing breakeven employment growth over the past two years. Second, the labor force participation rate. In theory, changes in the participation rate should be slow variables, but due to influences like aging populations, the pace of change in the US labor force participation rate since 2024 has been noticeably faster than before 2020.

Due to a sharp reduction in net immigration and a decline in the labor force participation rate, since 2025, the US breakeven employment growth has clearly decreased. This is a consensus among overseas studies; the difference lies in the estimates based on changes in net immigration (considering issues like illegal immigration and lack of real-time data, predicting net immigration flows is very difficult), leading to a wide range of current estimates for breakeven employment growth.

Recent research from the Federal Reserve and the Dallas Fed in March and April suggests that the current US breakeven employment growth may already be close to zero. Powell mentioned “close to zero” at the March FOMC press conference, and Fed Governor Waller and San Francisco Fed President Daly also referenced “approaching zero” in speeches in April. In 2024, the figure is roughly 150,000, in 2023 it peaked at over 200,000, and in the 2010s it was around 80,000 to 100,000. Other studies suggest that the current breakeven employment growth is between 0 and 50,000.

If the above estimates are roughly correct, i.e., the current US breakeven employment growth is near zero, what are the implications?

First, the probability of monthly non-farm employment being positive or negative may be roughly equal, or negative employment growth could become the norm. Low employment growth is no longer a “bad news” strong signal; ratios such as the unemployment rate, resignation rate, or employment rate may better reflect the health of the labor market.

Second, for the Federal Reserve, the short-term inclination to cut interest rates driven by employment downward pressure will rely more on the continued rise in the unemployment rate rather than weak or negative employment growth data.

Third, in the medium term, this could become another basis for the Fed to lean toward rate cuts beyond the “inflation gauge” (see “Inflation Metrics and Major Rate Guidance Changes”). When breakeven employment growth approaches zero, it indicates that the labor force’s contribution to potential economic growth is also near zero, potentially leading to a slowdown in economic growth, which would almost solely depend on productivity improvements. This trend aligns with Waugh’s monetary policy strategic theory, which advocates using rate cuts to further promote productivity prosperity and non-inflationary growth (see “The Fed’s ‘Waugh Moment’?”).

2. Review of the April Non-Farm Employment Data

(1) Non-farm employment growth exceeds expectations

In April, US non-farm employment increased strongly, surpassing market expectations. Non-farm employment added 115k jobs, versus Bloomberg’s forecast of 65k. The three-month average of non-farm employment additions is about 48k. Private sector non-farm employment increased by 123k. February’s employment change was revised from -133k to -156k, and March’s from 178k to 185k, a downward revision of 16k in total.

Employment breadth improved simultaneously. The three-month employment diffusion index rose from 52.6% to 54.2%, compared to an average of 64.1% from 2015-2019, and 61.6% in 2019. The single-month diffusion index declined from 56.8% to 53.8%, with averages of 60% (2015-2019) and 58.8% (2019).

Looking at major industries, the April employment growth mainly came from three sectors: education and health services (+46k, previous +91k), transportation and warehousing (+30.3k, previous +21.5k), and retail (+21.8k, previous +18.6k). Additionally, employment in leisure and hospitality, other services, construction, and professional and business services saw slight increases. Employment in information has declined for 16 consecutive months, and government employment continued to shrink slightly.

(2) Unemployment rate rises, labor participation rate falls

The unemployment rate increased slightly from 4.26% to 4.34%, versus an expected 4.3%. The labor force participation rate dropped from 61.9% to 61.8%, versus an expected 61.9%. The decline in participation indicates a reduction in labor supply; in this context, the slight rise in the unemployment rate suggests marginal deterioration in employment conditions according to household surveys. Household survey data show declines in labor force and employment, with increases in unemployed and non-labor force numbers.

Household survey figures: total population increased by 97k, labor force decreased by 92k, employment decreased by 226k, unemployed increased by 134k, and non-labor force increased by 188k.

Regarding reasons for unemployment: aside from fewer quits reducing unemployment by 54k, increases occurred in new hires, temporary layoffs, temporary unemployment, permanent layoffs (firms’ layoffs), and re-entrants, with increases of 91k, 41k, 40k, 28k, and 28k respectively.

The three-month moving average of the unemployment rate is 0.2 percentage points above the low point of the past 12 months, below the warning threshold of 0.5 percentage points per the “Samuelson rule.”

(3) Hourly wages grew less than expected month-over-month, and weekly hours rebounded

Private sector hourly wages grew at a slower-than-expected rate. MoM increase of 0.2%, versus an expected 0.3%, previous 0.2%. The annualized six-month change rate declined from 3.6% to 3.1%. YoY wage growth was 3.6%, versus an expected 3.8%, previous 3.4%. Weekly hours increased from 34.2 to 34.3 hours. Weekly wages grew by 0.5% MoM, driven by a 0.2 percentage point increase in hourly wages, while a decline in weekly hours pulled down the overall weekly wage growth by 0.3 percentage points.

(4) Interest rate hike expectations slightly cooled, AI-driven US stocks continue to hit new highs, and US Treasury yields edged lower

After the non-farm report, market expectations for rate hikes this year slightly decreased. The Federal Funds futures market priced in about 0.149 rate hikes for 2024, down to 0.058. Given the low probability of rate hikes, it can be understood that the market still expects no rate cuts this year.

In terms of asset performance, driven by AI tech stocks and Middle East geopolitical easing, US stocks continued to reach new highs; US Treasury yields declined slightly, and the dollar index fell. Dow Jones rose 0.02%, Nasdaq increased 1.71%, S&P 500 up 0.84%. The dollar index fell 0.44%, the 10-year Treasury yield dropped 4 basis points to 4.352%, and the 2-year yield fell 3.1 basis points to 3.88%.

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