Productivity Booms As Labor Market Shows Signs Of Revival
(…) on balance, the latest batch of labor market data suggests that employment conditions may be improving (…).
We [Ed Yardeni] agree with Jevons’ Paradox: Making a production input more efficient lowers the cost of the final product, stimulates demand for it, and ultimately results in greater demand for the input itself, despite the productivity gain.
Productivity is measured as nonfarm business output divided by labor hours worked. Output increased 3.3% y/y in Q1-2026, solidly above the comparable 2.7% rise in real GDP. Hours worked rose only 0.4% y/y.
So productivity increased 2.9% y/y, exceeding its historical average of 2.1%.
In our Roaring 2020s scenario, productivity growth is likely to increase to 3.5%-4.0% over the remainder of this decade and continue at that pace through the Roaring 1930s.
Unit labor costs is measured as hourly compensation divided by productivity. It rose by 1.2% y/y in Q1-2026, the slowest pace of growth since Q3-2023.
This confirms our view that the labor market isn’t currently a source of inflation but rather disinflation. For now, the latter is being offset by other inflationary pressures, i.e., higher energy prices and tariff-related increases in durable goods prices.
Inflation-adjusted hourly compensation is determined by productivity. Businesses can only sustainably raise real pay when productivity gains provide the underlying economic value. We expect productivity growth to rise close to 4.0% by the end of the decade, supporting equivalent real hourly compensation growth (chart).
Strong productivity growth tends to widen profit margins. Profit margins are currently at record highs, and boosting corporate profits. S&P 500 earnings growth has been surprisingly strong as a result.
The May 7 Challenger, Gray & Christmas report showed that US employers announced 83,387 job cuts in April. For the second consecutive month, AI was cited as the primary reason for layoffs, accounting for 26% of all cuts (roughly 21,490 jobs).
Despite the monthly jump, year-to-date layoffs remain down 50% compared to the same period in 2025. This confirms that while specific sectors are being disrupted by AI, the overall labor market remains resilient. It is also entirely consistent with our belief that AI will create jobs on net.
Yesterday, ADP reported that private-sector payrolls rose by 109,000 in April, the fastest pace of job creation since January 2025. The result is corroborated by Revelio Labs, which reported that total nonfarm payrolls rose by 66,400 in April, the most since March 2025, with gains led by health care and social services and the finance sector.
Yardeni here uses YoY growth rates (left chart) which is helped by a weak Q1’25. On a QoQ basis (right), productivity growth has slowed since Q3’25 to +1.6% annualized in Q4’25 and to +0.7% in Q1’26.
Since Q4’19, labor productivity has grown at an annualized rate of 2.1%.
Ed also focused on the YoY Challenger layoffs data, helped by the jump in tariff-induced levels in April of last year.
Challenger does not publish seasonally adjusted numbers but notes that job cuts in April were up 38% from March and that this April’s total is the third highest since 2009.
David Rosenberg’s own seasonal adjustments show layoffs rising from 37k in February to 40k in March and to 74.5k in April.
Also:
Hiring plans fell 69% in April to 10,049 from 32,826 in March. They are down 38% from the 16,191 hiring plans announced in April 2025. So far this year, employers have announced plans to hire 60,936 workers, down 13% from 70,058 new hires announced during the same period in 2025.
“With a number of factors potentially impacting summer travel plans as well as how businesses operate across sectors, we predict hiring plans will remain muted,” said Challenger.
Goldman Sachs’ wage tracker stands at 3.1% annualized in Q1 (vs. 3.7% in Q4) and 3.6% year-over-year (vs. 3.7% in Q4).
PCE inflation was +3.1% YoY in Q1, +3.5% YoY in March. On a QoQ basis: +4.5% annualized in Q1, +8.3% in March.
This seems like a good place to insert this:
Ray Dalio Says US Is Entering Period of ‘Great Turbulence’
Bridgewater Associates founder Ray Dalio said the US is headed for years of tumult, driven by large deficits, the growing wealth gap and left-right political divisions.
A new geopolitical system and disruptions from AI will also contribute to the turmoil, he added.
“There will be huge changes over the next five years, with all of these forces coming together,” Dalio said in an interview on the New York Times podcast Interesting Times with Ross Douthat. “And on the other side of that, it’ll be almost unrecognizable. It’ll be very different, and it’ll be a period of great change and great turbulence.” (…)
“We’re going to come into the midterm elections and I think that the Republicans will probably lose the House,” he said. “I think from that point on, you’re going to see an intensification of political and social conflict that’ll take place in that period, particularly between that election and the presidential election in 2028.”
Internationally, he said, there is no longer a rules-based order and the outcome of the US-Iran war can be defined in “almost black-and-white terms of who will control the Straight of Hormuz, and who will control the nuclear materials.”
Investors should maintain a well-diversified portfolio with between 5% and 15% in gold, he said. “When we look at history, we see that in all such periods, all the fiat currencies go down, and gold goes up.”
Separately, Apollo Global Management Inc. Chief Executive Officer Marc Rowan warned Thursday of a “massive geopolitical realignment” that will lead to “blue-collar ascendancy and white-collar stress.”
Yesterday, David Rosenberg published these 2 charts. I added the black dashed lines to show where the US was before Trump 1.0 vs the pre-1970’s period. Since 2018, the corporate sector has hugely outgrown the personal sector, creating the largest imbalance ever.
(…) US stocks and gold are hurtling toward a fourth year of double-digit gains, rallies so exceptional that there have been few such episodes in history, according to Bank of America Corp. strategists.
The S&P 500 is set for an annualized 20% gain while bullion is on track for a 30% rally, said the team led by Michael Hartnett. For stocks, such prolonged, “big stuff” advances only played out in World War II, the period of peace that followed a few years after that conflict and in the bubble of 1995-1999, they said. (…)
The latest impulse from the artificial intelligence capex frenzy has pushed the US market higher in a very narrow rally driven by a just a handful of stocks. Now, other areas have started to see stronger gains. (…)
Consensus forecasts now predict the American economy to expand by a nominal 5.5% this year, with earnings growth at 20%.
The BofA team tipped material stocks to be the next strong gainers. While this sector accounts for just 2% of the S&P 500, close to 30-year lows, this is set to change.
A geopolitical grab for resources, increased military spending, the AI capex boom and efforts to address housing shortages should make materials “the new bull on the block,” they said.
Meanwhile:
BlackRock Cut Its Private Credit Fund Five Percent.
Two days ago, Oaktree (OCSL) marked down its private credit fund and cut its dividend. Today, BlackRock TCP Capital (TCPC) did the same thing. Two major asset managers, same week, same category.
BlackRock cut its fund value 5 percent. Six portfolio companies drove most of the decline. The common thread was software loans written in 2021 when valuations were high and rates were near zero. Those same companies now carry higher debt costs and lower revenue as AI replaces their products.
That double pressure was not in any 2021 underwriting model. It is in the 2025 results.
Gundlach warned at Milken this week that private credit investors will lose money and compared the market to dot-com and pre-crisis mortgages.
Two funds confirmed. The next two weeks of BDC earnings reveal whether this is a pattern or a coincidence. One more major fund markdown makes it a pattern.
The data is now catching up to the warning.
Much more than microchips: Trade soars in AI-related goods, driving U.S. trade deficit
American imports related to the artificial intelligence boom have more than doubled since 2023 while non-AI imports have fallen. This hunger for AI investment has increased the U.S. trade deficit despite the highest tariffs in a century. AI-related exports from the U.S. have also surged, though not as much, according to new (AI-assisted) research from Minneapolis Fed Monetary Advisor Michael Waugh (Minneapolis Fed Staff Report 684, “Trade in AI-Related Products”).
By tapping a large language model (LLM) to analyze data for more than 18,000 products, Waugh pushes beyond obvious AI inputs, like computer hardware, to capture the broad range of goods related to the build-out of data centers and other infrastructure. It’s not just microchips and circuit boards: A sharp rise in categories such as electric power, cooling HVAC, and telecommunications clearly accompanies the recent investment in AI. (…)
As of January 2026, the analysis finds imports of AI-relevant goods were 111 percent higher in nominal dollars than the monthly average in 2023. Imports with low AI relevance were down 14 percent. Prior to 2024, these high and low AI-relevant bins displayed nearly identical trends.
Another way to quantify the change: For all of 2025, total dollar imports of AI-relevant products ($379 billion) were 72.6 percent higher than in 2023. Imports of products with low AI relevance rose just 2.5 percent.
This growth occurred alongside historic increases in U.S. import tariffs during 2025. Using methods from his tariff-related research, Waugh calculates that AI-relevant goods faced an effective tariff rate of just 4.5 percent, versus 12.1 percent for non-AI goods. Tariff exemptions—principally one for consumer electronics—covered about 69 percent of AI-relevant imports, a situation that remains largely unchanged after February’s Supreme Court rule invalidated some tariffs.
AI trade flows both ways. U.S. exports related to AI were 35 percent higher in 2025 than in 2023. But the rise in imports was much larger. In a counterfactual exercise, Waugh finds that without these AI effects on trade, the U.S. trade deficit would have been 16 percent smaller in 2025.
The analysis unsurprisingly finds that Taiwan, the world’s dominant producer of advanced semiconductor chips, is a major source of AI-relevant imports. But under Waugh’s broader umbrella of AI-related goods, Mexico is equally important, with Mexico and Taiwan each supplying about a quarter of U.S. imports. Mexico is a major source for electrical, cooling, and networking products.
Mexico is also a major destination for America’s AI-related exports. Some of this traffic, Waugh believes, represents supply chains that cross the southern border multiple times. AI-related trade also helps explain why U.S. trade with Mexico remained robust in the face of tariffs while imports from Canada dropped. (…)
EARNINGS WATCH
British Airways owner IAG warns Iran war will add €2bn to jet fuel bill Company plans to recoup about 60% of higher costs through savings and raising ticket prices
(…) “If the current conflict continues to restrict flows of both crude oil and jet fuel from the Middle East, there is the potential for supplies of jet fuel to be restricted on a global basis.” (…)
Toyota warns of $4.2bn hit from Middle East war World’s biggest carmaker sells record 10.5mn vehicles last year on strong demand for hybrids
Toyota has said the Middle East conflict will cost it ¥670bn ($4.2bn) in higher component prices and lost sales, becoming the latest carmaker to lay bare the strains caused by the turmoil.
The world’s biggest carmaker said on Friday that the hit from surging prices for parts such as aluminium and rubber tyres, as well as lost sales in the region, would result in a 22 per cent fall in net profit to ¥3tn. That would be the third consecutive annual drop.
“We do not believe we can fully offset negative ¥670bn Middle East impact,” said Takanori Azuma, accounting group chief officer at Toyota.
The surging costs add to the ¥1.4tn burden from US tariffs that was a factor in pushing down net profit by 19 per cent to ¥3.8tn in the 12 months to March, although the company managed to exceed its previous projection.
Toyota’s estimate highlights the growing fallout of the war on the global motor industry after the big three US carmakers sounded the alarm on a $5bn financial hit from commodities inflation. (…)
Azuma said the estimates for higher costs assumed that the war would continue until next March. (…)
The North America region made an operating loss of almost ¥300bn largely because of the tariffs, the company said. (…)
Rule of Law 2, Trump’s Tariffs 0 The Section 122 border taxes go down, his second big legal defeat.
Another tariff swing and another legal miss for President Trump. A 2-1 majority of the U.S. Court of International Trade on Thursday ruled his Section 122 tariffs unlawful. Although the White House may turn to other statutes to dun businesses and consumers, the decision is important for the rule of law and limits on willful presidential discretion.
Mr. Trump invoked Section 122 to reimpose his border taxes after the Supreme Court struck down his emergency tariffs in February. Section 122 lets a President impose tariffs as high as 15% for up to 150 days to address “large and serious balance-of-payments deficits.” Mr. Trump set his rate at 10% across the globe.
The President claims the tariffs are needed to reduce the $1.2 trillion U.S. trade deficit in goods. The legal and semantic problem is that the balance of payments and trade balance aren’t the same, as judges Mark Barnett and Claire Kelly explain. “It is clear that Congress was aware of the differences in the words it chose,” they write. (…)
Mr. Trump’s lawyers argue that the President can still impose tariffs because trade deficits are part of the balance of payments, and the President can pick and choose among the components. “Such an expansive reading of the statute would raise a non-delegation issue, which in turn would prompt a constitutional question,” the judges write.
But the judges say there is no need to address the constitutional arguments since the law doesn’t give the President the authority he claims. “Although the current account (and the balance of trade as a component of the current account) are relevant to balance-of-payments deficits, they are distinct, and the statute recognizes the distinction,” they write. (…)
The judges blocked the tariffs for the business plaintiffs, though they declined to issue a universal injunction.
The practical effect may be minimal since the litigation probably won’t be fully resolved before the law’s 150-day shot-clock for imposing the tariffs ends on July 24. Mr. Trump has also teed up new tariffs under Section 301 against specific countries for allegedly unfair trade practices, which Treasury Secretary Scott Bessent says will soon be unveiled.
(…) it’s hard to recall another President so gung ho about a policy as economically destructive and politically unpopular as are Mr. Trump’s border taxes.
Anthropic weighs deal for near $1tn valuation as revenue surges
Anthropic is weighing raising tens of billions of dollars this summer to fund a vast expansion in computing capacity, in a move that would catapult it past rival OpenAI to a valuation of almost $1tn. (…)
The new round is expected to value Anthropic at about $900bn pre-money and to raise as much as $50bn, said three of the people. They added it was likely to close within two months. OpenAI was valued at $852bn post-money in March after it closed a record funding round of $122bn. (…)
Warming seas are brewing extreme weather in months ahead, scientists forecast Concerns raised about the development of an El Niño warming cycle this year combined with climate change
Sea temperatures around the world were the second highest on record for the month of April, stoking concerns among scientists that an El Niño warming cycle is brewing that would intensify extreme weather.
The naturally occurring El Niño weather phenomenon, where water temperatures in the central and eastern tropical Pacific Ocean become significantly warmer, temporarily accelerates the rise in global air temperature, resulting in the spread of fires, floods and droughts. (…)
The World Meteorological Organization said in March that El Niño had a better than even chance of returning by the end of this year, while in April the US National Oceanic and Atmospheric Administration put the odds of an El Niño returning between May and July at 61 per cent.
At the end of April, the Bureau of Meteorology in Australia said all climate models, including its own, suggested continued ocean warming over the coming month, reaching El Niño thresholds later this year. (…)
“We know that El Niños in general amplify temperatures, so if the impending one is as severe as feared, then we’re in for one hell of a ride,” he said.
“The climate system is complex and predictions are not promises — but I think the coming months and into 2027 are very likely to include a succession of grim environmental stories.” (…)
