Employment Slump: US Adds Fewest Jobs in Six Months, Jobless Rate Edges Up

The red-hot U.S. labor market is finally starting to feel the chill from the Federal Reserve’s aggressive interest rate hikes over the past year. April’s employment report revealed clear signs that robust hiring and rapid wage growth are cooling in a shift that could allow central bankers to eventually take their foot off the brake.

Employers scaled back hiring last month, adding just 175,000 workers to payrolls – the smallest increase since October and a notable deceleration from the blazing 269,000 average pace over the prior three months. The unemployment rate ticked higher to 3.9% as job losses spread across construction, leisure/hospitality and government roles.

Perhaps most crucially for the inflation fighters at the Fed, the growth in workers’ hourly earnings also downshifted. Wages rose just 0.2% from March and 3.9% from a year earlier, the slowest annual pace in nearly three years. A marked drop in aggregate weekly payrolls, reflecting weaker employment, hours worked and earnings, could presage a softening in consumer spending ahead.

“We’re finally seeing clear signs that the labor market pump is losing some vapor after getting supercharged last year,” said Ryan Sweet, chief economist at Oxford Economics. “The Fed’s rate hikes have been slow artillery, but they eventually found their target by making it more expensive for companies to borrow, hire and expand payrolls.”

For Federal Reserve Chair Jerome Powell and his colleagues, evidence that overheated labor conditions are defusing should be welcome news. Officials have been adamant that wage growth running north of 3.5% annually is incompatible with bringing inflation back down to their 2% target range. With the latest print under 4% alongside a higher jobless rate, some cooling appears underway.

Still, policymakers will want to see these trends continue and gain momentum over the next few months before considering any pause or pivot from their inflation-fighting campaign. Powell reiterated that allowing the labor market to re-rebalance after an unprecedented hiring frenzy likely requires further moderation in job and wage growth.

“This is just a first step in that process – we are not at a point where the committee could be confidence we are on the sustained downward path we need to see,” Powell said in a press conference after the Fed’s latest rate hold. “We don’t want just a temporary blip.”

Within the details, the latest report offered some signals that could extend the moderating momentum. Job losses spread across multiple interest rate-sensitive sectors, including housing-related construction roles. The number of temporary workers on payrolls declined for the first time since mid-2021.

And while the labor force participation rate was unchanged, the slice of Americans aged 25-54 who either have a job or are looking for one hit 83.5%, the highest since 2003. If that uptrend in prime-age engagement persists, it could help further restrain wage pressures by expanding labor supply.

Of course, the path ahead is unlikely to be smooth. Many companies are still struggling to recruit and retain talented workers in certain fields, which could keep wage pressures elevated in pockets of the economy. And any resilient consumer spending could stoke demand for labor down the line.

But for now, April’s figures suggest the much-anticipated pivot towards calmer labor market conditions may have finally arrived. The Fed will be watching closely to see if what has been a searing-hot job scene can transition to a more manageable lukewarm trend that realigns with its price stability goals. The first cracks in overheated labor demand are emerging.

Job Market Remains Resilient Despite Cooling Pace of Hiring

The U.S. job market continues to display remarkable resiliency, even as the blistering pace of hiring has started to moderate from the torrid levels seen over the past couple of years. The latest employment data suggests that while businesses may be tapping the brakes on their aggressive hiring sprees, the overall labor landscape remains favorable for job seekers.

According to the ADP National Employment Report released on March 6th, private sector employment increased by 140,000 jobs in February. While this figure fell short of economists’ projections of 150,000 new jobs, it represents a solid uptick from the upwardly revised 111,000 jobs added in January. The leisure and hospitality sector led the way, tacking on 41,000 positions, followed by construction (28,000) and trade, transportation and utilities (24,000).

The ADP report, which is derived from payroll data, serves as a precursor to the highly anticipated monthly Employment Situation report issued by the Bureau of Labor Statistics (BLS). Economists anticipate that the BLS data, set for release on March 10th, will reveal an even more robust job gain of around 198,000 for February.

This sustained momentum in hiring underscores the enduring strength of the U.S. labor market, even as the Federal Reserve’s aggressive interest rate hikes aimed at taming inflation have stoked concerns about a potential economic downturn. The resilience of the job market has been a crucial bulwark against recessionary forces, buttressing consumer spending and overall economic growth.

However, there are signs that the once-blazing hot job market is starting to cool, albeit in a relatively controlled and gradual manner. The number of job openings, a key indicator of labor demand, has steadily declined from its peak of 12 million in March 2022 but remains elevated at nearly 8.9 million as of January, according to the latest Job Openings and Labor Turnover Survey (JOLTS) report.

This gradual tapering of job openings suggests that employers are becoming more judicious in their hiring practices, potentially a reflection of the broader economic uncertainty and the lagging effects of the Fed’s rate hikes. Nevertheless, the fact that openings remain well above pre-pandemic levels highlights the continued tightness of the labor market.

Moreover, the JOLTS data revealed a modest decline in the number of voluntary quits, often viewed as a barometer of workers’ confidence in their ability to secure better employment opportunities. While still historically high, the dip in quits could signal that some of the exceptional job-hopping dynamics that characterized the pandemic era are beginning to normalize.

From an investor’s perspective, the persistent strength of the job market, coupled with gradually decelerating inflation, presents a Goldilocks scenario – an economy that is neither running too hot nor too cold. This environment could potentially extend the current economic expansion, providing a favorable backdrop for corporate profitability and stock market performance.

However, investors should remain vigilant for any signs of a more pronounced slowdown in hiring or a significant uptick in layoffs, which could presage a broader economic downturn. Moreover, the Fed’s policy path remains a crucial variable, as overly aggressive rate hikes aimed at vanquishing inflation could potentially undermine the job market’s resilience.

Overall, the latest employment data depicts a job market that, while losing some of its blistering momentum, remains remarkably sturdy and continues to defy expectations of an imminent downturn. For investors, this Goldilocks scenario could prolong the economic cycle, but close monitoring of labor market dynamics and the Fed’s policy trajectory will be essential in navigating the road ahead.

Treasury Yields Jump Ahead of Crucial Economic Data and Powell Testimony

U.S. Treasury yields kicked off the new week on an upswing as investors braced for a slew of high-impact economic releases and testimony from Federal Reserve Chair Jerome Powell that could shape the central bank’s monetary policy path. With inflation still running high and the labor market remaining resilient, all eyes are on the incoming data to gauge whether the Fed’s aggressive rate hikes have begun cooling economic activity enough to potentially allow a pause or pivot.

The yield on the 10-year Treasury note, a benchmark for mortgage rates and other consumer lending products, rose by around 4 basis points to 4.229% on Monday. The 2-year yield, which is highly sensitive to Fed policy expectations, spiked over 5 basis points higher to 4.585%. Yields rise when bond prices fall as investors demand higher returns to compensate for inflation risks.

The move in yields came ahead of a data-heavy week packed with labor market indicators that could influence whether the Fed continues hiking rates or signals a prolonged pause is forthcoming. Investors have been hanging on every new economic report in hopes of clarity on when the central bank’s tightening cycle may finally conclude.

“The labor market remains the key variable for Fed policy, so any upside surprises on that front will likely be interpreted as raising the prospect of further rate hikes,” said Kathy Bostjancic, chief U.S. economist at Oxford Economics. “Conversely, signs of cooling could open the door to rate hikes ending soon and discussion over rate cuts later this year.”

This week’s labor market highlights include the Job Openings and Labor Turnover Survey (JOLTS) for January on Wednesday, ADP’s monthly private payrolls report on Thursday, and the ever-important nonfarm payrolls data for February on Friday. Economists project the economy added 205,000 jobs last month, according to Refinitiv estimates, down from January’s blockbuster 517,000 gain but still a solid pace of hiring.

Beyond employment, investors will also scrutinize fresh insights from Fed Chair Powell when he delivers his semi-annual monetary policy testimony to Congress on Wednesday and Thursday. Any signals Powell sends about upcoming rate decisions and the central bank’s perspective on achieving price stability could spark volatility across markets.

“Given how uncertain the path is regarding where rates will peak and how long they’ll remain at that level, markets will be hyper-focused on Powell’s latest take,” DataTrek co-founder Nick Colas commented. “Right now, futures are pricing in one more 25 basis point hike at the March meeting followed by a pause, but that could certainly change depending on Powell’s tone this week.”

Interest rates in the fed funds futures market are currently implying a 70% probability the Fed raises its benchmark rate by a quarter percentage point later this month to a target range of 4.75%-5.00%. However, projections for where rates peak remain widely dispersed, ranging from 5.00%-5.25% on the dovish end up to 5.50%-5.75% at the hawkish extreme if inflationary forces persist.

Central to the Fed’s calculus is progress on its dual mandate of achieving maximum employment and price stability. While the labor market has remained extraordinarily tight, the latest inflation data has sent mixed signals, muddling the policy outlook.

In January, the Fed’s preferred inflation gauge – the personal consumption expenditures (PCE) price index – showed an annual increase of 5.4% for the headline figure and 4.7% for the core measure that strips out volatile food and energy costs. While still well above the 2% target, the year-over-year readings decelerated from December, potentially marking a peak for this cycle.

However, other data including the consumer price index and producer prices have painted a stickier inflation picture. Rapidly rising services costs, stubbornly high rents, and short-term inflation expectations ticking higher have all fueled anxiety that the disinflationary process isn’t playing out as smoothly as hoped.

Complicating matters is the impact of higher rates for longer on economic growth and the broader financial system. Last week’s reports of Silicon Valley Bank and Silvergate Capital making severe business cuts crystallized the double-edged sword of tighter monetary policy. While intended to cool demand and thwart inflation, rising borrowing costs can tip the scale towards financial stress.

Given these cross-currents, all eyes will be fixated on this week’s dataflow and Powell’s latest rhetoric. Softer labor market figures and more affirmation inflation is peaking could pave the way for an extended pause in rate hikes later this year. But a continued barrage of hot data and rising inflation expectations could embolden the Fed to deliver additional super-sized rate increases to fortify its inflation-fighting credibility, even at the risk of raising recession risks. Market participants should brace for a pivotal week ahead.

Plusses and Minuses of Abundant Jobs

Image Credit: pxhere.com

The Employment Report Can be Viewed as Good for Economic Resilience

Does the Fed need to slow its tightening plans? Thankfully no, and darn it, no. On Friday, a report showed the U.S. economy created 263,000 jobs in September; this confirms a strong labor market, albeit one that has begun to slow somewhat. While this is a deceleration in jobs growth from the 315,000 jobs added in August, the report confirms broad-based strength in the labor market, at the average of what economists had been forecasting.

Why this is Positive for Stocks

The Fed has two main mandates, keep inflation in check (price stability), and make sure people have jobs (maximum employment). Friday’s report offers the clearest sign yet that the labor market is still showing considerable strength, although off its peak, as tighter monetary policy and higher labor costs begin to weigh on demand for workers. Although a slight cooling is evident, there is nothing in the report to suggest the Fed will alter its aggressive path of tightening monetary policy.

The cooling of the labor market is desirable when working to tame inflation. But it is likely employment is still promoting price pressures for labor.  The number should confirm that the Fed is inclined to hike rates by a fourth consecutive 0.75% in November.   

Of particular concern, as it relates to inflation, for the Fed is the continued strength in wages and decline for the month in labor-force participation, which remains well below its pre-pandemic level. The lack of workers allows inflationary bargaining power to those in the workforce or seeking work.

 Growth in average hourly earnings, which had slowed in August, remained steady in September, with wages climbing another 0.3%. And the labor-force participation rate erased a bit and was down 0.1 percentage point to 62.3% as fewer U.S. citizens looked for work than the month before. That contributed to the drop in the unemployment rate, which fell from 3.7% in August to 3.5%.

On the Downside

The resolve of this Fed can be stated this way, as long as the labor market remains healthy, they will remain hyper-focused on reining in inflation without concern for people’s 401ks or other distractions. They can afford to kill a few jobs, and bond or stock investors are not on the Fed’s list of primary concerns.

News to Use From Jobs Report?

Jobs were added in a number of industries, with big gains in the healthcare, leisure, and hospitality sectors. These are industries where positions had been lost during the pandemic. The construction industry, which many economists expected would shrink, added 19,000 jobs in September, in line with the average monthly growth so far this year in construction.

On the bad side, the retail sector lost more than 1,000 jobs in September. It remains broadly strong after three months of gains, 1000 across the population is not yet a concern.

The numbers reflect ongoing catch-up in hiring. Employers are still working to fill jobs lost during steps taken related to Covid-19 fears; the increased demand in many areas makes it difficult to find enough workers. The scenario could keep the labor market strong over the coming months, even if the Fed is successful in slowing the broader economy.

Other data not headlined in the labor market report shows signs the labor market remains strong. The number of workers who were employed part-time for economic reasons, meaning they would have preferred full-time work but had seen their hours cut or were unable to find full-time work, declined by 306,000 in September after rising for two straight months. More work, if wanted, is a strong factor that gives the Fed breathing room.

Another very telling group that showed employment expansion is not as robust as the numbers suggest, is the increased hiring of temporary help. Companies tend to release temporary workers; first, this type of work continued to rise. The sector added another 27,000 jobs in September.

Take Away

Employment remained strong through September. While this may indicate the Fed can continue to raise rates at will for stock market participants, it also means businesses have the potential for more output. So, while the headline news may scream rates ‘will go up!’ and ‘markets should beware!’, the better message is businesses continue to hire. This is especially true for leisure and less accurate for retail companies; the economy can be expected to keep plodding along if everyone who wants a job has a job.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.bls.gov/news.release/empsit.nr0.htm