Inflection point?

Bottom line

Nonfarm payrolls rose by a stronger-than-expected 236,000 jobs in March, on top of February’s upwardly revised gain (by 15,000 jobs) to a solid increase of 326,000. That compares with an estimated consensus gain of 230,000 last month and our own more muted forecast for a modest increase of only 170,000. In addition, household employment more than tripled to a powerful gain of 577,000 jobs in March (up from 177,000 in February), which helped drive the unemployment rate down to 3.5% (just off a 53-year low of 3.4% in January). Meanwhile, wage inflation eased to a new 21-month low of 4.2%, while the participation rate ticked up to a 3-year high of 62.6%.

But this undeniably good news is nonetheless inconsistent with a spate of much weaker-than-expected data released this past week. The lagging Job Openings & Labor Turnover Survey (JOLTS) and ADP reports declined sharply, the Challenger job cuts continue to soar, and initial weekly jobless claims (including revisions over the past three months) surged. This collectively suggests that the labor market is slowing under the weight of nine Federal Reserve rate hikes over the past 13 months. 

In addition, both ISM indices for March were weaker than expected. Manufacturing declined from 47.7 in February to 46.3 in March, marking the fifth consecutive month below the critical 50 level, which has been a reliable recession signal over the past 75 years. Services plunged from 55.1 in February to 51.2 in March. 

What will the Fed do next? This is the last jobs report that Fed policymakers will have in hand before their critical policy-setting meeting on May 3. Based upon this morning’s bond-market response to the strong March employment report, the market seems to believes there’s a roughly 70% chance the Fed will hike the fed funds rate by another quarter point to a target range of 5-5.25%. 

The market's view of the Fed's decision on its June 14 meeting is a coinflip, suggesting a pause might be in order, followed by four consecutive rate cuts to finish the year. In contrast, however, Fed officials have openly discussed pausing into next year if they achieve their terminal rate by midyear. In addition, tremors from last month’s banking crisis have certainly tightened bank-lending standards and activity, which Fed Chair Jerome Powell has said probably adds another 25-50 basis points of quasi-tightening to the equation.

Inflation report key The March CPI inflation report, released April 11, now takes on outsized importance for the Fed. Nominal inflation is expected to decline to 5.2% year-over-year (y/y) in March from 6% in February. But core inflation (which strips out food and energy) is expected to increase to 5.6% y/y in March from 5.5% in February. So another quarter-point hike from the Fed may well be appropriate. 

Other labor-market indicators contracting sharply: 

• Lagging JOLTS This measure surprisingly plunged 6% month-over-month (m/m) in February to a 21-month low of 9.9 million job openings, and down by 17.4% from a record 12 million job openings in March 2022. There are now 1.7 job openings for every unemployed worker and the voluntary quitters rate rose a tick to 2.6%. 
• ADP private payroll survey March added a weaker-than-expected 145,000 jobs, well below consensus expectations for a gain of 210,000 jobs and down 44% from February’s upwardly revised increase of 261,000 jobs. ADP is now down 69% from last June’s cycle peak of 465,000 jobs. But wage growth soared 6.9% y/y last month for job stayers and by 14.2% for those who changed jobs. 
• Challenger job cuts The report showed that layoffs surged by 89,700 in March, up 319% from a year ago and up 15% from February. Technology (39,200) and financial (13,400) layoffs accounted for nearly 59% of the terminations. 
• Initial weekly jobless claims Surprisingly, claims leapt by 228,000 for the week ended April 1, compared with consensus expectations for a gain of only 200,000. But the government just completed updating its seasonal adjustment factors, resulting in an upward adjustment of 312,000 claims so far this year and 176,000 over just the past four weeks. Claims have now risen 25% since their cycle trough of 182,000 on September 24. 

Wage inflation moderates, but hours worked decline Average hourly earnings rose by a 21-month low of only 4.2% y/y in March, down from 4.6% in February and 5.9% in March 2022. But wages rose 0.3% m/m in March, up a tick from February’s 0.2% gain. In addition, average hours worked slipped a tick for the second consecutive month to 34.4 in March. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs from the economy. 

Unemployment and labor impairment rates fall; participation rate rises Household employment surged by 577,000 jobs in March, more than triple February’s pace (an increase of 177,000 jobs). The number of unemployed people fell by 97,000 in March, marking declines for the seventh time in the last 10 months. The unemployment rate (U-3) slipped to 3.5% in March, just off January’s 53-year low of 3.4% (lowest since 1969). But the Fed’s March Summary of Economic Projections forecasts it will rise to 4.5% by year-end 2023, an increase that could push the economy into recession next year. 

The labor impairment rate (U-6) also fell a tick to 6.7% in March, just above a cycle low (dating back to 1994) of 6.5% in December. The civilian labor force rose by 480,000 workers in March, up from a gain of 419,000 in February. That drove the participation rate up for the fourth consecutive month to 62.6% in March, compared to the pre-pandemic cycle high of 63.4% in February 2020. 

K-shaped recovery narrows The unemployment rate of high wage-earning workers was unchanged in March for the third consecutive month at 2%, compared with September’s cycle low of 1.8%. But that of low wage-earning workers plunged to 4.8% in March from 5.8% in February (versus its 30-year low of 4.3% in February 2022). The personal savings rate has risen from a 17-year low of 2.7% in June 2022 to 4.6% in February (down sharply from 26.3% in March 2021). This suggests unskilled workers are returning to the labor market as their excess savings dwindle. 

Sector details soft 

• Private payrolls posted a weaker-than-expected gain of 189,000 jobs in March (consensus was 218,000), compared with a stronger gain of 266,000 jobs in February. 
• Government hiring (mostly state and local) has soared over the past three months, adding 47,000 jobs in March, 60,000 in February and 119,000 in January. 
• The manufacturing sector lost 1,000 jobs in each of the past two months, compared with a gain of 11,000 jobs in January. The ISM manufacturing index has fallen into contraction territory under 50 in each of the past five months to 46.3 in March.
• Construction lost 9,000 jobs in March, after gains of 12,000 in February and 26,000 in both January and December. Mortgage rates more than doubled from 3% to 7.35% over the past year, which slowed the housing market significantly, though they have recently fallen back toward 6%.
• Temporary hiring (an important leading indicator of employment trends) decreased by 11,000 jobs in March, after gains of 3,000 in February and 17,000 in January, versus job losses of 55,000 jobs in December and 49,000 in November. 
• Retailers lost 15,000 jobs at the start of the important spring “Mapril” season in March, compared with gains of 41,000 in February, 22,000 in January and 27,000 in December. But the industry shed 46,000 jobs in November, 6,000 in October, and 11,000 in September in preparation for a lackluster Christmas season. 
• Leisure & hospitality added 72,000 workers in March, 90,000 in February and 99,000 in January. This category has helped to spark the improvement in the unemployment rate of low wage-earning workers.

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