The U.S. March employment report indicated that total jobs increased by 236,000, illustrating that hiring remains strong, albeit at a slower pace. The Bureau of Labor Statistics Friday report points toward easing concerns of a wage price spiral that underscores the direction of monetary policy as the Fed is poised to hike its policy rate by 25 basis points at its May 3 meeting.
The unemployment rate stands at 3.5%, while wages increased by 0.3% on the month and are up 4.2% on a year ago basis. Most importantly, the three-month average annualized pace of wage growth has slowed to 3.8%, which is moving toward what policymakers at the Federal Reserve believe to be in line with stable wage and inflation expectations. This will ease risks around a wage price spiral linked to elevated service sector inflation. Thus, it is now appropriate to begin considering a “one and done” policy path at the Federal Reserve, given the slower pace of overall economic activity, elevated financial stress and expectations that lending will tighten inside the real economy in the near term.
It is important to note that the March employment survey did not adequately capture the impact of notable tightening of financial conditions following the banking crisis. The impact of risks around the financial sector and tighter lending will be felt in coming months. We anticipate that hiring will slow noticeably in the near term, in line with the roughly 65,000 jobs that we think the economy needs to produce monthly to meet growth in the labor supply.
Policy implications
A slower pace of hiring is clearly a relief to policymakers looking to cool an overheated economy and labor market. However, neither the slower pace of hiring nor the cooling of inflation is sufficient to cause the Federal Reserve to end its efforts to restore price stability at the current time. We expect the central bank to hike its policy rate by 25 basis points to a range of 5% to 5.25% at the May meeting, and then engage in a strategic pause that will likely last until early 2024 when we see the first possibility of rate cuts being enacted.
Should inflation increase later this year on the back of OPEC production cuts or an unexpected increase in global demand, the Fed can always resume rate hikes. But for now, it looks like we are approaching a near-term peak in the policy rate and the central bank will seek to ascertain the impact of past rate hikes on the real economy and of tightening lending that show up in the data over the next three to six months.
The data
Total private employment increased by 189,000 jobs, mostly due to a 39,000 jobs increase in professional and business services; 65,000 new jobs in private education and health care; and 72,000 more jobs in the lower-paying leisure and hospitality sector. Trade and transport added 4,000 jobs on the month, while information gained 6,000 jobs. Meanwhile, temp jobs declined by 11,000 and financial sector employment dropped by 1,000 jobs. Government hiring advanced by 47,000 jobs on the month.
Higher-paying, goods-producing jobs declined by 7,000, manufacturing employment fell by 1,000 positions, and 9,000 jobs were lost in the construction sector.
The prime aged (25-54) employment participation rate increased to 83.1%, which is above the pre-pandemic peak. Thus, at this point any relief in terms of meeting demand will need to be provided via immigration or through the integration of artificial intelligence into the production of goods and the provision of services. In our estimation, these two factors are going to play a much larger role in the economic and policy narrative in the near- to medium-term.
Total private hours worked declined by 0.3% on the month. Manufacturing hours worked stand at 40.3 on average per week, which is unchanged from February, and weekly overtime increased by 3 hours on the month. Total aggregate hours worked declined by 0.1% in March.
The labor force participation rate rose to 62.6%. The household survey of employment, which captures independent contractors and other forms of non-traditional work, showed an increase of 577,000 jobs.
The takeaway
The U.S. labor market remains stout and 3.5% unemployment matches a 50-year low. Despite the robust increases in January and February, the March labor market data underscores a historically tight labor market. That strength, however, has not resulted in a wage price spiral, as wage gains are easing with a top line 4.2% increase on a year-ago basis, reflecting that tight labor market and the 3.8% three-month average annualized pace that illustrates easing in the pipeline. Wage data tends to suggest that risk of a wage price spiral is easing, creating space in the near term for the Federal Reserve to engage in a strategic pause in its efforts to restore price stability.
