(Reposted with March Jobs data)
Written by Howard Schneider
Washington (Reuters) –
Historically low unemployment in the United States and rising wages are likely to keep the Federal Reserve on track to raise interest rates by another quarter of a percentage point next month, as risks of a financial crisis recede while concern about inflation remains high.
US job growth is slowing, something Federal Reserve policymakers expected as they raised borrowing costs. But the economy still added 236,000 jobs in March, and posted an average gain of 345,000 per month during the first quarter, well above the level the central bank sees consistent with its 2% inflation target.
The unemployment rate eased to 3.5% last month from 3.6% in February, even as the labor force grew by about half a million people and the participation rate rose slightly. Average hourly earnings increased 0.3%, slightly faster than the previous month.
The latest jobs report provided the last broad glimpse into the job market Fed officials will get before the May 2-3 policy meeting, and marks another step toward refocusing the debate from a potential crisis prompted by the collapse of two regional banks to their efforts. to reduce high inflation.
Investors in Fed-rate overnight contracts have added to bets that rates will continue to rise, with a quarter percentage point increase next month now given a roughly two-thirds probability.
“Despite weakness in employment readings in the run-up to the non-farm payroll report, employment growth has not yet collapsed although there are clear signs of continued moderation,” Kathy Bostancic, chief economist at Nationwide, wrote shortly after the report’s release. .
Bostancic said the Fed in general would be pleased with the data, though she added that she “still supports another rate hike in May – which we think could be the last of the tightening cycle. Followed by a prolonged pause.”
In another possible sign of easing inflationary pressures, the pace of wage growth eased year-on-year to 4.2% in March from 4.6% in the previous month, continuing the recent downward trend.
Economists polled by Reuters had expected a gain of 239,000 jobs in March, with hourly wages rising at an annual rate of 4.3 percent and the unemployment rate staying at 3.6 percent, a level seen less than 20 percent the time since World War Two.
By comparison, salary growth in the decade prior to the COVID-19 pandemic was about 180,000 per month, and wage growth has remained close to the 2%-3% range that federal policymakers see as consistent with their goal of a 2% annual increase in the expenditures price index. personal consumption.
The PCE price index rose 5% annually from February, or 4.6% when volatile food and energy prices are excluded, far too high for the Fed’s liking with improvement only coming slowly in recent months.
Ahead of the report, Gregory Daco, chief economist at EY Parthenon, said he expected it to show that “labor market tightness will continue to be a feature of this business cycle,” and prompt the Fed to continue raising interest rates.
The question now is how long this trading cycle can last, and whether the seeds of a serious slowdown are taking root.
The projected average unemployment rate for the end of 2023 by Federal Reserve officials at their meeting in March was 4.5%, indicating a relatively sharp rise in the unemployment rate that in the past indicated an ongoing recession.
Fed officials will never say that their goal is to cause a recession. But they were also blunt, as it is, there are too many jobs chasing too few workers, a recipe for higher wages and prices that can start to reinforce each other the longer the situation continues.
“The labor markets are still calm, and I would say, unemployment is still at a very low level,” Boston Fed President Susan Collins said in an interview with Reuters last week. “Until labor markets calm down, at least somewhat, we are not likely to see the slowdown that we would probably need” to bring inflation down to the Fed’s target.
Change, however, may be coming.
Daco pointed to the decline in the average number of hours worked per week in February, a statistic he says he is watching for evidence of the “most worrisome labor market slowdown.” The average workweek in March fell to 34.4 hours, from 34.5 hours in the previous month.
Payroll provider UKG said shift work among its sample of 35,000 companies fell 1.6% in March, an off-season adjusted figure that indicated overall job growth that was positive but not “hectic as much,” said Dave Gilbertson, a vice president at the company. What it is. It was.” Job gains in January and February were larger than expected and produced a brief moment when Fed officials thought they might have to return to larger rate hikes, a sentiment that has faded after the recent failures of Silicon Valley’s bank and signature bank.
Meanwhile, economists at the Conference Board said a new index that includes economic, monetary and demographic data showed 11 of the 18 major industries at risk of full layoffs this year.
The Conference Board’s economists were bearish in saying that a recession is likely to start between now and the end of June, though “it may be some time before there is widespread job loss,” said Frank Steamers, chief economist at the think tank.
Eye on services
Some of it might start.
On Thursday, the Labor Department unveiled revisions to its measure of unemployment benefit listings that show more than 100,000 more people recently received unemployment benefits than previously expected. Moreover, outside staffing firm Challenger, Gray & Christmas, said the nearly 270,000 layoffs announced this year through March were the highest quarterly total since 2009, outside of the pandemic.
But for the Federal Reserve, that’s just one piece of the puzzle. The extent to which a “slump” in the labor market is linked to lower inflation may depend on where job growth slows, and over what timescale.
New research from the Kansas City Federal Reserve suggests that the process may be more steady than expected because the service sector industries that currently drive wage growth and inflation are the least sensitive to changes in monetary policy.
If industries such as manufacturing and home construction follow familiar patterns as the Federal Reserve raises interest rates, credit becomes more expensive and slows demand and employment. But Kansas City Federal Reserve economists Carly Dilts Steadman and Emily Pollard write that the service industries responsible for most of America’s economic output are more labor intensive and less sensitive to price increases.
“The services sector, in particular, has contributed significantly to recent inflation, reflecting persistent imbalances in labor markets where supply remains weak and demand remains strong,” they wrote. “Because the production of services tends to be less capital-intensive and the consumption of services is less likely to be financed, it also tends to respond less quickly to higher interest rates. Thus, monetary policy may take longer to affect a major source of current inflation.”
(Reporting by Howard Schneider; Editing by Dan Burns and Paul Simao)