Rising energy costs and a cooling-but-steady labor market

Dave Harrison Smith, CFA
Chief Investment Officer
April 6, 2026

Energy prices and consumer squeeze

Gas prices are moving higher again today. This has been one of the clearest transmission channels from the war in Iran into US markets. The surge in March saw gas prices rise from a national average of $2.94 to $3.99. This five-week move represented a 35.9% increase, the largest five-week increase since the Energy Administration Agency began tracking the data in 1991. Price pressures have continued into April, further compounding this move.

Average national retail gasoline prices, regular blend

Consumer response to higher gas prices is a well-studied phenomenon. Studies have found that gas demand itself is relatively inelastic; in non-economist speak, that means consumers do not purchase more/less of a good if the price decreases/increases. Households still need to commute, families need to run errands, and folks still maintain daily routines. Rising gas prices have historically had little impact on driving behavior.

Where adjustment does occur is in the consumption basket, specifically in reduced purchasing behavior for non-discretionary goods. As gas prices rise, it pinches consumer wallets, particularly for lower- and middle-income households. Studies have shown that consumers reallocate spending away from areas such as leisure, out-of-home dining, and retail goods. This can explain some stock reactions in March as gas prices spiked, particularly among companies more exposed to these sectors and among lower-income households.

Consumer and retail spending have been a central pillar of U.S. economic growth over the last decade. The impact of changes in consumer spending can thus have a meaningful effect on growth, with the initial impact likely to be felt in discretionary spending. Further, the rapid shift threatens to dim consumer outlook on finances and erode consumer confidence. Any sustained pressure over a long period of time threatens to become a broader economic headwind.

Jobs report: A strong number, though outlook remains uncertain

Last week, we highlighted a key data release: the Bureau of Labor Statistics Nonfarm Payrolls report, which many view as an estimate of net job creation in the U.S economy. February’s print, published in early March, had come in well below expectations, showing a decline of 133 thousand jobs versus expectations of a modest gain. We noted that this was in contrast to several other labor market indicators, such as continuing unemployment claims and private-sector employment estimates, which had indicated greater stability. As a result, we were focused on this data release to confirm or refute the February weakness

The March report surprised to the upside, with payrolls increasing by 178,000 jobs, well ahead of expectations of approximately 60,000.

Broadly, this data reinforces our view that the labor market is cooling but not cracking. The moving three-month average of jobs gained has turned modestly positive after a softer period in the second half of 2025. Importantly, this level of job creation should be consistent with a stable unemployment rate, currently in the low 4% range, particularly in the context of the country’s recent shift to lower net immigration and reduced population growth.

In isolation, this report would be encouraging for the Federal Reserve, suggesting that the labor market remains on solid footing. Yet the background is anything but static, and the high degree of uncertainty stemming from both the war in Iran and rapid advances in artificial intelligence raises the difficulty of forecasting the labor market outlook. Against this context, the takeaway is straightforward: this was a relatively strong report, even if the broader path remains uncertain.

Change in BLS Nonfarm Payrolls by month, rolling 3-month average

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