What a stronger than expected jobs report tells us about the state of the economy

The Labor Department reported Friday that unemployment held steady in April and that the U.S. added 115,000 jobs, surpassing expectations. For more on the numbers and what they tell us about the state of the economy, Amna Nawaz speaks with Mohamed El-Erian, a professor at the Wharton School of Business and chief economic advisor at Allianz.

Amna Nawaz:

The Labor Department reported today that unemployment held steady in April and that the U.S. added 115,000 jobs, surpassing expectations. Both the Nasdaq and the S&P 500 touched all-time highs today on the news, which followed a number of strong earnings reports across industries.

For more on the numbers and what they tell us about the state of the U.S. economy, we’re joined by Mohamed El-Erian. He’s a professor at the Wharton School of Business and chief economic adviser at Allianz. That’s a financial services company.

Welcome to the show. Thanks for joining us.

Mohamed El-Erian, Chief Economic Adviser, Allianz:

Thanks for having me.

Amna Nawaz:

So those jobs numbers were almost double what analysts expected. Unemployment holds at 4.3 percent. Wages are up 3.6 percent annually. What stands out to you from today’s data?

Mohamed El-Erian:

So, I think three things stood out for me.

One is the job creation, which was, as you say, double what was expected, showed a very strong demand for labor, even though we have thrown everything at this economy, but the labor market remains resilient. Second, on the supply side, on supply of workers, there are challenges.

We saw the labor force participation come down, and we saw the labor force itself contract. So there are challenges on the supply side, even though demand is strong. And, finally, earnings. Average weekly earnings were lower than expected, and that speaks to a bigger reality, which we got confirmation for yesterday, which is the share of labor in national income continues to go down and is at record low levels.

Amna Nawaz:

You mentioned despite everything we have thrown at this economy. And we should note, despite the war in Iran, despite energy prices surging, the tariff uncertainty, the U.S. stock markets have been breaking a number of records recently, right?

There was 10 percent in April alone. You did warn in a recent Financial Times piece that this can’t go on forever. You wrote in part this: “There is a geoeconomic ceiling to even this market rally, and we will get there if the war is not resolved.”

So, Mr. El-Erian, that war is now more than two months on. The back-and-forth on whether it will end or not continues. Where is that ceiling? And when will we reach it?

Mohamed El-Erian:

So, this article was from earlier this week, and it does note this incredible decoupling of the markets from the geoeconomic reality.

Why is that happening? Three big reasons. One is dominance of tech. Five companies account for half the gains in the stock market. So it’s very much a tech story. The second issue is that so far corporate earnings have held up, even though CEOs are warning of what’s ahead. They’re very worried about household budgets.

And the third issue is, the U.S. is the cleanest dirty shirt, if you like. Compared to the rest of the world, we’re doing better and we’re attracting capital. Can this go on forever? No. If this war continues, if gas prices remain at these levels, if the divergences we’re seeing within the population, Wall Street versus Main Street, high-income versus low-income, if they get worse, then I suspect the stock market will have difficulty decoupling from this geoeconomic reality.

Amna Nawaz:

Tell me more about that divergence, because another set of numbers we’re looking at is the consumer sentiment report from the University of Michigan that came out today. That hit a record low. That’s down nearly 8 percent from a year ago.

Do you see any reason why those numbers would turn around for American consumers any time soon?

Mohamed El-Erian:

No.

I mean, we have had — this is the second month of record low for consumer confidence. This time around, it’s being driven by current conditions. Last month, it was being driven by expectations of future conditions. So that’s quite an interesting change. And I suspect that has to do with gas prices.

But the consumer is quite a paradox, because they say they’re feeling awful, and yet they continue to spend. And the concern we have is that that cannot continue, especially among low-income households that are being hit really, really hard.

And if you look at the details of the jobs report, what we started with, you will see, for example, Black and Hispanic unemployment is getting worse, while Asians and white unemployment are staying as is or getting better. Black unemployment is now twice the level of white unemployment.

So, within an economy that looks good at the average, we are seeing major divergences that should be of concern.

Amna Nawaz:

While we have you, I’d love to ask you about what will be now Jerome Powell’s last week as Fed chair. It ends next week. We know President Trump has said repeatedly that he wants to cut interest rates. So if confirmed, I want to ask what you would expect to see from Mr. Trump’s pick to now lead the Fed, that is, Kevin Warsh.

Will you expect him to push on that front to cut rates?

Mohamed El-Erian:

So the market expects no cuts well into next year. Why? We have got a highly divided Fed. We have got both parts of the mandate, inflation and employment, of concern. So Kevin Warsh, when he comes in, he’s not going to be able to force his authority immediately.

I suspect we won’t get a rate cut. And there’s one more complication is that Chair Powell isn’t leaving the board of the Fed. He’s doing something really unusual. He’s stepping down as chair, but not leaving the board. If you put all these conditions together, this is a Fed that will basically stay where it is for most of this year, if not well into next year.

Amna Nawaz:

Mohamed El-Erian, thank you so much for your time. We really appreciate it.

Mohamed El-Erian:

Thank you. My pleasure.