Hiring cooled in April from the torrid pace of 269,000 jobs on average during the first three months of 2024, as the economy generated an average increase of 175,000 positions in total employment and enters the second quarter of the year, according to data released on Friday from the Bureau of Labor Statistics.
For those concerned with the diffusion and composition of hiring, the one-month diffusion index increased to 60.4% from 54% in March, which suggests an improved breadth of hiring, despite a cooling pace. The data tend to support that the American labor market is moving into better balance as the Federal Reserve remains quite patient on when to begin reducing its policy rate.
The April employment report is both constructive and encouraging from the point of view of policymakers who have looked for a cooling in hiring and wages, which are both on display in the report. This should play into a repricing of risk, which had moved too far in the direction of rate hikes and stagflation which the economic data simply do not reflect.
The unemployment rate increased to 3.9% (3.865%) while average hourly earnings advanced 0.2%, translating to a 3.9% increase from one year ago. More importantly, average hourly earnings increased 3.6% at a three-month average annualized pace; this is likely to be taken as a win by policymakers looking to reduce interest rates later this year. The unemployment rate remains below 4% for a remarkable 27th consecutive month, something the American economy has not observed since the 1965 to1970 period when the availability of labor was curtailed by the Vietnam War-era military conscription.
Policy considerations
The policy takeaway from the April report is much like what was observed in the first quarter gross domestic product report: the economy and labor market simply remain much too strong for the Federal Reserve to embark on a rate-cutting campaign.
With real final private demand increasing at a 3.1% pace and demand for services advancing at a 4% pace through the first three months of the year, we expect that fundamental demand for labor will remain stout, albeit characterized by more modest gains, through mid-year. Monthly job gains at a more sustainable pace between 150,000 to 200,000 should result in a modest increase in unemployment to 4.1% this year.
Once the recent noise in the inflation data dissipates and rents ease, government inflation data should set the stage for two 25 basis point rate cuts by the Fed starting in September.
The data
The April jobs report featured a net downward revision of 22,000 over the past few months despite an upward revision of the March estimate in job creation to 315,000. In April, the private sector saw an increase of 167,000 in employment while government hiring at all levels slowed to 8,000, down from the three-month average of 62,000, the primary reason for the miss on the consensus forecast of 240,000.
Goods producing sector jobs increased 14,000, construction by 9,000 and manufacturing by 8,000. Private service providing jobs increased by 153,000 jobs, led by an increase in employment of 52,000 in trade and transport, 20,000 in retail, 6,000 in financial hiring, and 95,000 in private health and education. The leisure and hospitality sector added 5,000 jobs on the month. There were 4,000 jobs cut in professional business services, 8,000 in the information sector and a net 16,000 decline in temp hiring on the month.
The household survey, a separate survey that captures non-traditional and self-employed individuals, showed a net increase in the labor force of 87,000 and a 25,000 increase in employment. Total private hours ticked down to 34.3 from 34.4, manufacturing hours held steady at 40 as did overtime hours at 2.9. The number of people employed part time for economic reasons remained essentially unchanged at 4.5 million.
The labor force participation rate arrived unchanged at 62.7%, the employment to population ratio ticked down to 60.2% from 60.3% and the median duration of unemployment eased from 9.5 weeks to 8.7 weeks, which implies that if one loses a job, they are finding one within two to three months.
The takeaway
A cooler pace of hiring to a more sustainable pace of 175,000 jobs should be interpreted as beneficial with respect to the inflation outlook going forward. It should remove any lingering concerns of a wage price spiral and put to bed loose and undisciplined talk from the corners of the trading community about stagflation.
We expect that as the economy and job market cools overall growth will slow to 2.4% and the unemployment rate will rise to 4.1% before the end of the year. That is commensurate with further cooling in inflation growth and two 25 basis point rate cuts by the Federal Reserve, which we expect to commence in September.
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