Investing Insights

EMPLOYMENT WATCH  •  May 6, 2025  •  Jon Wolfenbarger

Rising Unemployment Rate + High Wage Inflation = “Stagflation”

AUSTIN, TX — Investors were encouraged by the “better than expected“ April jobs report, but the most important metrics — the unemployment rate and wage inflation — continue to point to economic “stagflation”. This is not bullish for the American people, not to mention the Fed and Wall Street.

Unemployment Rate Rise Is Recessionary

The monthly government “jobs” report said nonfarm payrolls rose by 177K in April, well above expectations of 138K. However, the last two months were revised down by 58K, so these “upside“ numbers should be taken with a grain of salt. A modest positive is that employment growth improved from 1.6% in March to 1.9% in April, as shown below.

However, full-time employment growth slowed from 1.6% in March to 1.2% in April.

Average hours worked continues to be weak and held steady at 34.3 hours.

Job openings fell from 7.48 to 7.19 million, as shown here.

Quits and hires rose, but remain in a long-term downtrend, as this chart shows.

The unemployment rate held steady at 4.2%. Over the past two years, it has risen by 0.8%. Every time the unemployment rate has risen at least 0.5%, there has been a recession, as this chart shows. Maybe this time will be different, but after the most aggressive Fed rate hiking cycle in four decades and the longest yield curve inversion in history, we think that is wishful thinking.

Wage Growth Remains Too High For Fed Rate Cuts

Wage growth ticked down slightly from 3.84% in March to 3.77%, as shown below. But that is still nearly double the Fed’s 2% target, which is why the Fed remains on hold with rate cuts, at least until the unemployment rate gets worse or some other major problem causes chaos in financial markets.

NASDAQ Breadth Weakens Further

Given these “stagflationary” economic conditions, it is not surprising to see stock market breath weakening. The chart below shows NASDAQ New Highs less New Lows has fallen to new cycle lows after some modest improvement last year. This important measure of market breath peaked in late 2021 and has fallen at levels consistent with a bear market since then. That suggests the bear market of 2022 is still ongoing beneath the surface of the headline stock indexes that have been driven by megacap Tech stocks.

Investment Implications

It will be hard for the Fed to follow Trump’s orders to cut interest rates when “jobs are beating expectations” and wage inflation is nearly double their 2% target. 

The Fed has been very fortunate that the unemployment rate has not already risen much more than it has and a recession has not become obvious. Maybe that is because they increased the money supply by an unprecedented 40% in response to the covid lockdowns and higher immigration helped production in recent years. But Fed tightening has always had a negative impact on the economy and immigration is going the opposite direction now, so we think the Fed’s luck will run out this year.

The NASDAQ understands what is going on. We recommend not ignoring the message it is sending to investors right now.