Evidence of a weakening labour market is not likely strong enough for the Federal Reserve to decide against a tenth successive rate hike in May. US payroll numbers for March showed 236,000 jobs were added to the US economy last month, marking solid, though moderating, jobs growth. Refinitiv customers can keep up to speed with developments in US wages and employment by accessing the US labour market folder on Chartbook.
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At face value, the news provided by March’s payroll number was limited but investors are watching closely for signs that further monetary policy tightening is not required.. The March payroll number was 79k below the 6-month average and 3k below the Reuters poll; a very minor downside surprise. There was also a net 17k downward revision to the January and February numbers. January’s spectacular number was revised well below 500k while February’s estimate was revised upwards.
It is important to note that the impact of March’s banking turmoil is likely not fully reflected in this data: payrolls are based on a survey of non-agricultural businesses and the reference for survey respondents is the pay period that includes the 12th of March. The majority of Americans are paid weekly or bi-weekly so developments in the second half of the month are not within the reference period.
The composition of the payroll numbers by sector also showed the challenge policymakers still face in restoring inflation to target; the largest share of job creation was in services (leisure and hospitality) where inflation is more sticky. Higher wages in the service sector have been passed on to prices, along with energy and transport costs.
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Last week’s report also confirmed that the unemployment rate fell slightly to 3.5%, a historical low. It has changed little from this level over the past year. Sometimes unemployment rates can tell misleading stories but no matter how you slice it, there is currently little slack in the US labour market. In March, 43% of US small business owners reported job openings they could not fill.
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One aggravating factor is the decline in participation since the start of the COVID-19 pandemic. The labour force participation rate was 62.6% in March, 0.7 percentage points lower than in February 2020. This change is part of a wider trend of declining labour force participation since the Global Financial Crisis and is mirrored in other advanced economies. For instance, the UK government has tried to address this issue with measures designed to attract people back to the labour market in its Spring Budget. There has been an uptick in US participation in each month since last November though; if continued this momentum will add to slack created by weakening economic activity.
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A labour market this tight in an environment of rising living costs will generate high wage growth, which we have seen over the past year. Year-on-year wage growth remains very high at 5.1% but there have been some encouraging signs of moderation in the monthly numbers since the start of the year: average hourly earnings rose by 0.3% month-on-month in March and January, the two lowest points since early 2021.
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This week’s inflation data has not provided a significant indication of further easing in price pressures. Headline inflation was below expectations at 0.1% month-on-month, returning the year-on-year headline rate to 5%, but core prices increased by 0.6% in March. The change in core prices was in line with expectations and resulted in a slight increase in the year-on-year rate to 5.6%.
These elevated rates of inflation and healthy labour market indicators prevail despite 450 basis points of rate hikes in a year as well as the second and third largest US bank failures in history last month. Minutes from the FOMC meeting in March showed several members had considered pausing hikes given banking sector developments and the cumulative increase in the policy rate. They were ultimately convinced of a need to go higher by recent economic data.
How much policy tightening do investors believe is still to come? At the close of play yesterday, Fed funds futures showed the market assigning a roughly 70% probability of a further 25 basis point hike in May. That would take the target range above 5% but there is very limited expectation of further tightening from that point.
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The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.
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