TV’s talking heads, even on America’s more sophisticated financial news networks, seem determined to turn every bit of good macroeconomic news into yet another tortured argument for a Fed rate hike. Nowhere was that more evident than with today’s most excellent Trump jobs report.
The headline number was strong. Nonfarm payrolls rose by 172,000 in May, roughly double market expectations. The unemployment rate held steady at 4.3 percent. March and April were revised up by a combined 93,000 jobs. Private payrolls rose by 120,000. Average hourly earnings increased 0.3 percent on the month and 3.4 percent over the year.
In any normal world, the message would be obvious: the American labor market is not rolling over. It is healing. It is broadening. And most important, it is beginning to show precisely the kind of industrial rotation America needs.
The most important story in this report is not the usual media fixation on whether the unemployment rate ticked up or down by a tenth. It is the reversal of the Biden-era bleeding of manufacturing employment.
Manufacturing added 7,000 jobs in May. That may not sound like a tidal wave, but the direction matters. The old pattern was factory erosion, offshoring, and managed decline. The new pattern is reshoring, tariff-driven investment, and a rebuilding of the industrial base.
The same point shows up in construction. Construction employment rose by 17,000 in May, and the deeper story is the steady creation of construction jobs tied to the wave of new domestic investment in factories, equipment, and industrial capacity. These are not just jobs for today. They are the physical foundation for tomorrow’s manufacturing output.
That is what tariffs are supposed to do when used correctly. They change the investment calculus. They make it less attractive to arbitrage cheap foreign labor, lax environmental rules, and tariff loopholes. They make it more attractive to build, hire, and produce here.
There was one anomaly in the report: local government added 55,000 jobs. That number bears watching. Local-government hiring is not the same thing as private-sector dynamism. But even if that figure went to zero for the rest of the year, the broader labor-market picture would remain solid.
Why? Because the number of jobs needed each month to maintain a low unemployment rate is now substantially lower than it was under Joe Biden’s open-border labor-market model. During the Biden years, the United States absorbed an extraordinary immigration surge. That surge increased the labor supply, intensified competition at the lower end of the wage scale, crowded out many American workers, and put downward pressure on wages in the sectors most exposed to illegal and low-wage labor.
With the border no longer functioning as a conveyor belt for cheap labor, America does not need Biden-scale monthly job growth simply to keep unemployment from rising. A lower breakeven jobs number is not a sign of weakness. It is a sign that the labor market is no longer being distorted by a massive artificial labor-supply shock.
Of course, the TV intelligentsia quickly concluded upon release of the report that since unemployment is not going up but headline inflation is, surely the Fed must raise rates.
Repeat after me — and after Alan Greenspan and Ben Bernanke: never raise interest rates into the teeth of an oil-price shock.
Greenspan did not raise rates into the 1990 Gulf War oil shock. The Fed was already moving toward easing as the economy weakened, and it continued easing through the 1990–91 recession rather than treating the oil spike as a reason to tighten.
Bernanke, after completing the prior tightening cycle, held firm in 2006 as energy prices and geopolitical risks complicated the inflation picture. The lesson is straightforward. When inflation is being driven by oil, war, and supply disruption, the Fed cannot drill a barrel, refine a gallon, secure a shipping lane, or deter Iran with a rate hike.
The Bernanke episode is particularly instructive because it historically rhymes with the moment we face now. In 2006 and 2007, Iran was defying the world over its nuclear program. Mahmoud Ahmadinejad was threatening Israel. Iranian forces were harassing maritime traffic and ultimately seized British naval personnel in the Persian Gulf. Oil markets were on edge because the world understood the strategic vulnerability of the Strait of Hormuz.
Today, the same basic facts have returned in a new form. Iran terror inflation is not demand inflation. It is not wage inflation. It is not a hot-labor-market inflation spiral. It is a geopolitical oil shock imposed on the American consumer by a hostile regime.
That is precisely why the Fed must not overreact. Raising rates into this shock would not reduce Iranian aggression. It would not lower geopolitical risk. It would not increase energy supply. It would simply weaken housing, punish manufacturing investment, and risk smothering the very industrial recovery now beginning to show up in the jobs data.
Kevin Warsh will try to hold firm. Jay Powell may try to undermine him. But the larger point is this: the Fed should look through Iran terror inflation, not create a recession trying to cure it.
It would be helpful if the financial news networks and the Fed board began to hold firm as well and embrace this mantra: NEVER raise interest rates into the teeth of an oil-price shock.
