A series of indicators show that the US labor market is holding up remarkably well, even as the Middle East war wavers between combat and negotiation. Apart from rising energy prices, the war's impact on the US economy has been limited, while job growth driven by expanded investment in artificial intelligence (AI) infrastructure remains solid. With continued signs that labor market instability poses less risk than inflation, forecasts are emerging on and around Wall Street that the Federal Reserve could even raise interest rates this year. However, as consumer sentiment has deteriorated, earnings at consumer goods companies such as Whirlpool have worsened significantly.
US Employment Data Posts Unexpected Strength... 'Contrast With High Inflation' as Rate Hike Talk Stirs Within the Fed
On May 6, US employment data firm Automatic Data Processing (ADP) said private-sector employment in the US increased by 109,000 last month from March. This was the largest gain since January last year. It also exceeded the expert estimate compiled by Dow Jones (84,000). In detail, employment in the education and health services sector rose by 61,000, while transportation, logistics and utilities, and construction increased by 25,000 and 10,000, respectively. The professional and business services sector declined by 8,000. The wage growth rate was 4.4% from the same period last year.
This was not the only signal that the US labor market has remained stable despite the war's fallout. The Job Openings and Labor Turnover Survey (JOLTS) released by the US Department of Labor on May 5 showed US job openings in March totaled 6.866 million, exceeding the Dow Jones expert estimate of 6.8 million. While slightly lower than the 6.9 million in February, just before the war broke out, it was not at a level that would indicate damage. In detail, job openings in the professional and business services sector fell by 318,000, while the finance and insurance sector increased by 98,000. Hires surged by 655,000 from February to reach 5.554 million, and the hiring rate rose 0.4 percentage points to 3.5%. Hiring increased across major industries, including transportation, warehousing and public services (108,000), professional and business services (165,000), and accommodation and food services (124,000). Layoffs totaled 1.867 million, up 153,000 from February, and the layoff rate rose from 1.1% to 1.2%.
Initial jobless claims for April 26 to May 2, released by the US Department of Labor on May 7, also came in at 200,000, below the expert forecast of 206,000. In addition, initial jobless claims for last month's 19th to 25th were 190,000, down 25,000 from a week earlier. This was well below the expert estimate of 212,000. When initial jobless claims fall below 190,000, it marks the first time in 57 years since September 1969. Continuing jobless claims, for those who have applied for unemployment benefits for two or more weeks, also stood at 1.766 million as of last month's 19th to 25th, down 10,000 from the previous week. This was the lowest level in about two years since April 2024. Jobless claims are considered a leading indicator that reflects the layoff trends of companies. These figures suggest that the US labor market is not slowing sharply despite economic uncertainty, including high interest rates, tariffs, and inflationary pressure from the Middle East.
The stabilization of the US labor market is in stark contrast to inflation, which has shown signs of instability since the war broke out between the US, Israel, and Iran. Personal consumption expenditures (PCE) for March, released on the 30th of last month, increased 3.5% from a year earlier, far higher than the 2.8% rise in February, just before the war. Even the core PCE price index, which excludes energy and food, rose 3.2% from the same month a year earlier and 0.3% from the previous month, showing that inflationary pressure excluding oil prices is also not small. The core PCE price index in February, before the war, rose 3.0% year-on-year and 0.4% month-on-month, coming in higher than the headline figure.
According to the American Automobile Association on May 6, the average price of gasoline in the US reached $4.54 per gallon (about 3.78 liters) as of that day, the highest level since June 2022. The price of diesel also rose 3.8% to $5.67 per gallon, up from $5.46 a week earlier.
Consumer Sentiment Worsens, Dealing a Direct Blow to Whirlpool's Earnings... Attention Turns to April Jobs Report on the 8th
Given the employment situation, views are emerging in the Fed and on Wall Street that the possibility of a rate hike should now be considered. At the Fed's Federal Open Market Committee (FOMC) on the 29th of last month, of the 12 members with voting rights, as many as three — Dallas Fed President Lorie Logan, Cleveland Fed President Beth Hammack, and Minneapolis Fed President Neel Kashkari — supported only holding rates and opposed the statement that signaled an accommodative monetary stance, including the phrase "further adjustments." It was the first time in 34 years since October 1992 that four Fed members dissented on a rate decision, including pro-White House Governor Stephen Miran, who argued for a 0.25 percentage point rate hike. According to CME FedWatch on May 7, the federal funds futures market projected a 70.0% probability that the Fed will hold rates throughout the rest of the year. Furthermore, it raised the probability of a rate hike from 16.3% the previous day to 22.2%, and lowered the probability of a rate cut from 13.1% to 7.8%. The probability of holding rates at the FOMC meeting on the 17th of next month, expected to be chaired for the first time by Fed Chair nominee Kevin Warsh, also reached 94.8%.
Kashkari, who dissented on the language signaling rate cuts, appeared on CBS's "Face the Nation" on May 3 and said, "I'm not comfortable signaling rate cuts right now," adding, "The situation could worsen, and in that case we may have to go in the opposite direction (a rate hike)." Chicago Fed President Austan Goolsbee, who is not a voting member this year, also referred to the March PCE price index in a Fox News interview on May 2, calling it "not good news."
Of course, not all economic indicators conflict with the possibility of a rate cut that President Donald Trump wants and that nominee Warsh might partly accept. The deterioration of consumer sentiment is a representative indicator. The final consumer sentiment index for last month released by the University of Michigan fell 3.5 points from March to 49.8, dropping to the lowest level since 1978.
According to The Wall Street Journal (WSJ) on May 7, US home appliance maker Whirlpool also fell into an earnings slump as consumer sentiment contracted. On May 6, Whirlpool released an earnings report saying it recorded a net loss of 56 cents per share in the first quarter of this year, far short of the market forecast of a 38-cent-per-share profit. It also sharply lowered its full-year earnings forecast for this year to $3 to $3.5 per share from the previous $6 per share. According to the WSJ report, Whirlpool explained that "the Iran war caused a sharp drop in US consumer confidence in late February and March, resulting in a recession-level industry slump." Whirlpool Chief Financial Officer (CFO) Roxanne Warner also argued at the earnings call that "consumers are cutting back on purchases of high-priced products." Whirlpool's stock plunged 11.91% on May 7 due to the earnings deterioration.
The biggest inflection point for gauging the direction of the US labor market and interest rates is expected to be the April nonfarm payrolls report released by the US Bureau of Labor Statistics (BLS) on the 8th. US nonfarm jobs increased by 178,000 in March from February, even immediately after the Iran war broke out, completely overturning Wall Street's expectation of only a 59,000 gain. This became a key basis for the Fed's confident decision to hold the benchmark rate last month. The preliminary May University of Michigan consumer sentiment index, also due that day, is another indicator to watch. The more results that show the US economy holding firm despite the war, the greater the Fed's monetary policy dilemma is likely to become.
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