The strong employment report for March increases the odds that the US economy is heading for the proverbial soft landing. But that reduces the likelihood of inflation falling to the Fed’s elusive 2% target.
Most importantly for investors, the jobs numbers indicate that the Federal Reserve will raise interest rates again this cycle, at the FOMC meeting in early May. However, this is subject to change based on upcoming inflation readings or the potential fallout from the recent banking turmoil.
The Bureau of Labor Statistics reported Friday that non-farm payrolls increased by 236,000 last month, essentially splitting the difference between various polls of economists that showed estimates of 230,000 or 240,000, depending on who was polling the forecasters. Although strong by historical standards, the salary hike was the smallest in the post-pandemic economic recovery.
The unemployment rate, derived from a separate survey of households, fell by a tenth of a percentage point, to 3.5%, in March. And while that was still above the cyclical low of 3.4% reported for January, the unemployment rate fell for positive reasons – a sharp rise in both people entering the labor market and finding jobs.
The weak spot in the March baseline data was a 0.1-hour drop in the average workweek, to 34.4 hours, the lowest rate of expansion but in line with the pre-pandemic workweek. Average hourly earnings continued to moderate, up 0.3% in the most recent month, in line with the 3.8% annual gain for the past three months.
Announcement – scroll to continue
But overall, this was a better-than-good set of jobs numbers released while the stock market was closed on Good Friday and bonds and futures had a short trading session. The data also belied concerns that followed the release of other labor market indicators earlier in the week.
The Job Opportunity and Labor Turnover Survey, or Jolts, for February showed fewer than 10 million job vacancies for the first time since May 2024. But there were still 1.67 jobs for every unemployed person.
New claims for unemployment insurance were found to be higher after a review of the latest data. The final week’s total of 228K is a decrease of 18K from the previous week. While this is higher than the frequency of less than 200,000 reported prior to the revisions, it is still historically low.
The monthly employment situation depicts that the jobs market remains tight and inconsistent with the inflation cut to the Fed’s 2% target.
Announcement – scroll to continue
Right now, the economy is enjoying “a little bit of clean inflation,” said Neil Dutta, head of economics at Renaissance Macro Research. “The Fed would welcome that. But the risk is that a soft landing will lead to some deflationary dynamics later on,” he added in an interview on Friday.
For now, labor supply growth has met demand, according to John Riding and Conrad de Quadros, economic advisors at Brean Capital. If labor force participation had remained flat since last November while jobs expanded at the speed already seen, the unemployment rate would have fallen from 3.6% to 2.9% over that period.
Jobs certainly couldn’t grow so quickly without people entering the workforce, but this counterfactual shows just how powerful unsustainable employment can be, they wrote in a client note. This growth in the workforce helped slow the 12-month increase in average hourly earnings to 5.1% from 5.7% in November. But, they added, this is still well above the federal inflation target of 2%.
Announcement – scroll to continue
In the shorter term, wage gains slowed further to a 3.2% annual rate in the first three months of the year, Dutta said. He added that assuming productivity grows at 1%, that would put wage growth at a pace in line with the Fed’s target, something we haven’t seen for some time.
Dutta believes the uncertainty caused by the recent regional banking troubles should prompt policymakers to pause at the FOMC meeting on May 2-3 and keep the Fed’s main federal funds target at the current range of 4.75%-5%, though He says the committee should keep their bias tightened. This is contrary to the pricing of federal funds futures contracts up a quarter of a percentage point, According to CME FedWatch.
Expectations about Fed policy have swung wildly since the Silicon Valley bank failure early last month, as a close chart from Bianco Research shows. Expectations for a half-percentage-point hike were replaced by a quarter-point increase last month amid concerns about the impact of higher interest rates on bank lending.
Announcement – scroll to continue
As the crisis appears to have abated, expectations of a move to 5%-5.25% in May have rebounded. That decision is still weeks away with more data coming, particularly the consumer price report for March due on Wednesday.
In the end, the March employment report did little to settle the standoff between the Fed and interest rate markets. Fed Chair Jerome Powell & Co. is sticking to their own script to raise interest rates again, at an average rate of 5.1% by the end of the year.
Markets are anticipating rate cuts starting as early as July, with three cuts to a range of 4.25%-4.50% by December, to counter what they see as a flagging economy ahead of an election year in 2024. In this case, we could be facing stagflation, If prices and wages remain constant even after a series of sharp increases in the Fed’s interest rates.
write to Randall W. Forsyth at [email protected]