The jobs report in March suggests that there will be a further interest rate increase at the Fed
The solid March employment report further increases the odds that the US economy is headed for a familiar soft landing. But it reduces the chances that inflation will reach the Federal Reserve’s elusive 2% target.
Most importantly for investors, the jobs numbers suggest the Fed will raise interest rates one more time this cycle, at the Federal Open Market Committee’s meeting in early May. However, it may change based on upcoming inflation readings or possible fallout from the recent banking crisis.
The Bureau of Labor Statistics reported Friday that nonfarm payrolls rose by 236,000 last month, essentially splitting the difference between various surveys of economists that showed estimates of 230,000 or 240,000, depending on who surveyed the forecasters. While the wage increase was robust by historical standards, it was the smallest of the post-pandemic economic recovery.
The unemployment rate, taken from a separate survey of households, ticked down by a tenth of a percentage point, to 3.5%, in March. While still above the cyclical low of 3.4% reported for January, the unemployment rate fell for positive reasons – a sharp increase in both people entering the labor force and finding work.
The weak point in the March establishment data was a 0.1[ads1]-hour drop in the average workweek, to 34.4 hours, the lowest of the expansion but back in line with the pre-pandemic workweek. Average hourly earnings continued to moderate with a 0.3% increase in the past month, in line with a 3.8% annual increase over the past three months.
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But overall, this was a better-than-good set of jobs numbers released while the stock market was closed for Good Friday and bonds and futures had a shortened trading session. The data also belied the concerns that followed the release of other labor market indicators earlier in the week.
The Job Openings and Labor Turnover Survey, or Jolts, for February showed fewer than 10 million unfilled positions for the first time since May 2021. But there were still 1.67 job openings for every unemployed person.
New requirements for unemployment benefits turned out to be higher after revisions of recent data. Last week’s total of 228,000 represented a decrease of 18,000 from the previous week. While that’s above the sub-200,000 pace reported before the revisions, it’s still historically low.
The monthly employment report shows a continued tight labor market that is inconsistent with bringing inflation down to the Fed’s 2% target.
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Right now, the economy is enjoying “a bit of a blameless disinflation,” said Neil Dutta, chief economist at Renaissance Macro Research. “The Fed will welcome that. But the risk is that a soft landing leads to some reflationary dynamics later on,” he added in an interview on Friday.
For now, growth in labor supply has met demand, according to John Ryding and Conrad DeQuadros, financial advisors at Brean Capital. If the labor force participation rate had remained stable since last November while jobs had expanded at the pace actually seen, the unemployment rate would have fallen from 3.6% to 2.9% over that time.
Granted, jobs could not have grown so quickly without people entering the workforce, but this counterfactual expression shows how unsustainably strong employment has been, they wrote in a client note. This labor force growth has helped slow the 12-month increase in average hourly wages to 5.1% from 5.7% in November. But it remains well above the Fed’s 2% inflation target, they added.
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In the shorter term, wage gains have slowed further, to an annualized rate of 3.2% in the first three months of the year, Dutta said. Assuming productivity grows at a 1% rate, that would put wage growth at a pace consistent with the Fed’s target, which has not been seen for some time, he added.
Dutta believes the uncertainty caused by the latest regional banking problems should cause policymakers to pause at the FOMC meeting on 2-3. May and keep the Fed’s key federal funds target in the current range of 4.75%-5%, although he says the panel should maintain its tightening bias. That is contrary to the Fed funds futures pricing of a quarter percentage point increase, according to CME FedWatch.
Expectations for Fed policy have fluctuated dramatically since the failure of Silicon Valley Bank early last month, as the nearby chart from Bianco Research shows. Expectations of a half-percentage-point rise were replaced by a quarter-point gain last month amid concerns about the impact of rising interest rates on bank lending.
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As the crisis appears to have subsided, expectations of a move to 5-5.25% in May have resurfaced. That decision is still weeks away with a lot more data to come, especially the March consumer price report due on Wednesday.
Ultimately, the March employment report did little to settle the conflict between the Fed and interest rate markets. Fed Chairman Jerome Powell & Co. is sticking to its script of a further rate hike, to a median interest rate of 5.1% at the end of the year.
Markets expect rate cuts starting as early as July, with three reductions to a range of 4.25%-4.50% by December, to counter what they see as a sliding economy ahead of an election year in 2024. If so, we could be confronted with stagflation, if prices and wages remain sticky even after the Fed’s series of sharp rate hikes.
Write to Randall W. Forsyth at randall.forsyth@barrons.com
