Bad Case of Loving You
English singer Robert Palmer is well known for his sartorial style and powerful voice but is less remembered for his economic prowess. In “Bad Case of Loving You,” Palmer exclaimed: “Doctor, doctor, give me the news. I’ve got a bad case of lovin’ you.” Today, the Bureau of Labor Statistics has a similar love affair with the healthcare industry, which has been the backbone of America’s rising employment figures.
On the surface, things look reasonably bright. The nonfarm payroll (NFP) report for April suggested a robust gain of 115,000 new jobs—well ahead of the 65,000 expectations—and followed the revised 185,000 increase for March. These consecutive upside surprises from U.S. employers helped bolster opinions that the labor market is holding up well, despite rising energy costs and geopolitical instability.
However, dig deeper and concerns emerge. For example, Figure 1, which illustrates the 12-month change in job gains by industry, shows that the majority of gains have occurred in only the private education and health services sector, while many other sectors have declined marginally. Gains in private education and health services are also occurring in sectors with below-average weekly earnings.
Accordingly, the pull-through on the demand side is likely to be lower because there is less incremental discretionary spending from these two sectors. Meanwhile, many of the small recent declines in job growth come from cyclical sectors like manufacturing, trade, transport, and professional services, which enjoy higher average weekly take-home pay. Government jobs have also been a large detractor from employment growth; but thankfully, public-sector jobs do not tend to be pro-cyclical.
Dig even deeper into the jobs data and the concerns grow. Figure 2, for instance, shows that education is actually detracting from job gains, much like the majority of the broader labor market. Instead, employment gains are heavily concentrated in healthcare and social assistance; job gains in the healthcare sector itself are driven mostly by ambulatory services, hospital staff, and nursing care.
The isolated job growth in a non-cyclical sector is perhaps why the market largely shrugged off the “good news.” The Treasury market reaction was muted and finished the day with slightly lower yields. On a broader scale, sentiment is waning, perhaps due to both the challenging economic prospects of individual consumers and high geopolitical volatility.
As Figure 3 shows, the University of Michigan survey, released shortly after the NFP report, suggested a further deterioration in confidence among respondents. The current personal finances outlook decelerated for a third consecutive month, signaling that American pocketbooks are more stretched to meet personal demands at the margin, perhaps due to rising costs related to inflation. Although the economic outlook of respondents was neutral, overall sentiment dropped to its lowest level since the summer of 2022.
Officials at the Federal Reserve seem content with the overall growth in jobs, even if the gains are too narrowly concentrated in our opinion. Nevertheless, it seems that inflationary pressures are likely to have more pull in the tug-of-war between the Fed’s dual mandate. The dovish case for rate cuts would need additional deterioration of indicators, similar to the University of Michigan survey, to regain ground.
Separately, inflation hawks may soon find themselves in a tough spot, with rising inflationary pressures and a weak job market if hiring in health services slows; given the acyclical nature of this sector, the arrival of that tough spot is more likely a question of when, not if. For now, though, the labor market still seems to have a bad case of loving healthcare.
FROM THE DESK
Agency CMBS — Investors made their annual trek to Memphis for the regional dealer confab, so last week was pretty quiet. We traded a Ginnie Mae project loan with a 10–10–1 open prepayment structure and an incremental spread of 55 basis points over a standard execution. The story otherwise remained the same: REMIC execution is slow but grinding forward, low supply has helped keep a lid on spreads, and appetite remains healthy.
Municipals — AAA tax-exempt yields were relatively flat throughout the yield curve, week over week. Primary new issuance picked up this past week, with over $12 billion coming to market. Due to an elevated calendar, we saw deals come slightly wider than in previous weeks. The market’s ability to digest the sizable calendar provided a positive tone for the municipal bond market amid the continued volatility. Investors put $1.8 billion into funds last week, while high-yield funds saw $560 million of those inflows. In 2026, we saw positive fund flows in 17 of the first 19 weeks of the year.
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