Tight US jobs market demonstrates
resilience of economy
For many months, the conventional wisdom
has been that, in 2024, the economy will decelerate after breakneck growth in
2023. Yet the data released so far suggests otherwise. Last week, we learned that
the job market in the United States was on fire in March after strong growth in
both January and February. In the first quarter of this year, over 800,000 new
jobs were created, an annual rate of over 3 million. Moreover, despite a tight
labour market, wage pressure evidently eased in March. Let’s look at the
numbers:
By industry, there was no change in
employment in manufacturing. In addition, there was almost no growth of
employment in transportation and warehousing, information, financial services,
or professional and business services. Instead, the lion’s share of job growth
came from construction, leisure and hospitality, healthcare and social
assistance, and state and local government. Those four categories accounted for
231,000 new jobs, or 76% of new jobs created. This suggests that, despite
strength, some pockets of the economy are weak.
Interestingly,
despite the acceleration of employment growth in March, the number of intended
job dismissals continues to rise. A survey conducted by Challenger, Grey,
and Christmas found that, in March, US-based companies intended to dismiss
90,309 workers, the most in 14 months. On the other hand, this partly reflected
Federal government intentions to dismiss 34,000 workers. Still, clients often
ask me how I can say there is a tight labour market when so many dismissals are
taking place. The answer is that there is plenty of churning in the job market,
with jobs being eliminated while others are created. Moreover, the lion’s share
of new job creation takes place in small- to medium-sized businesses while many
dismissals take place in larger organizations.
Also, the establishment survey provides
data on wages. Average hourly wages in March were up 4.1% from a year earlier,
the lowest increase since June 2021. In other words, despite a tight labour
market, wage growth is decelerating. Still, wages are rising faster than
inflation, providing households with an increase in purchasing power. The deceleration in wages offers hope that
wage pressure may ease sufficiently to enable a further reduction in inflation.
The separate survey of households found
that the number of people participating in the labour force increased far faster
than the working age population. Consequently, the participation rate
increased—although it remains below the pre-pandemic level. Moreover, the
number of people working increased faster than the labour force, thereby
reducing the unemployment rate from 3.9% in February to 3.8% in March.
In the face of a tight US jobs market, the
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Finally, if labour productivity continues to
rise as rapidly as it did in recent quarters, inflation will likely decelerate
even faster. After all, rising productivity enables companies to pay higher
wages without having to raise prices commensurately. Another factor that could
help to further reduce wage pressure is immigration. In fact, it is likely that
the continued deceleration in wages partly reflects a high level of immigration
which has boosted labour supply. Productivity and immigration will be factors
that the Federal Reserve considers as it decides when to start cutting interest
rates. Yet, for now, the strong job numbers suggest that the Fed can wait, that
the economy can thrive with relatively high interest rates. Neel Kashkari,
President of the Federal Reserve Bank of Minneapolis, said that he had been
leaning toward two rate cuts this year, but now wonders if any are needed.
The financial market reaction to the
employment report was interesting. Following the release of the jobs report,
there was an increase in equity prices and an increase in bond yields, an
unusual combination. On the one hand, the strong jobs report and the
deceleration in wages suggest strong demand and a likelihood that interest
rates will decline. These factors influenced equity traders. On the other hand,
the strong job market also signalled that the Fed can probably wait longer,
thereby putting upward pressure on bond yields.
Meanwhile, the US job openings rate (the
share of available jobs that remain unfilled) was 5.3% in February for the
third consecutive month. The number of openings was up slightly from January to
February. In addition, the number of hires was up significantly from January to
February and the hiring rate was up from 3.6% in January to 3.7% in February.
Finally, the separation rate was unchanged in February at 3.5%. Overall, this
data, which comes from the government’s Job Openings and Labour Turnover Survey
(JOLTS), indicates a relatively strong job market.
The most important indicator, the job
openings rate, is down considerably from its peak of 7.4% in March 2022.
However, compared to the pre-pandemic period, the current rate of 5.3% is the
highest ever. In the decade prior to the pandemic, the job openings rate had
peaked at 4.9% in January 2019. Thus, the current job market remains
historically tight. That, of course, is a concern for the Federal Reserve which
worries that a tight labour market will continue to drive up wages, thereby
boosting inflation for labour-intensive services. By industry, the highest job
openings rates were in healthcare and social assistance (7.8%), financial
services (6.8%), professional services (6.4%) and leisure and hospitality
(6.4%). The lowest job openings rates were in wholesale trade (2.8%), retail
trade (3.2%), information (3.7%), transportation/warehousing/utilities (4.0%),
and manufacturing (4.3%).
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Investors
also expect the Fed to ease monetary policy more gradually than the Fed
policymakers themselves have signalled through their own interest rate
forecasts. For example, the futures market indicates that investors expect the
Fed to hit a Federal Funds interest rate of 3.6% in 2027. The members of
the Fed’s policy committee offer a median forecast of 2.6%. Thus, investors
have become more cautious than the Fed policymakers. This is a change from late
last year when investors were very optimistic about rapid rate cuts. Why have
investors shifted to a view of more gradual monetary easing? First, the economy
has shown more resilience than previously expected. Second, investors likely
expect stronger growth going forward, in part due to optimism about labour
productivity. Productivity grew
surprisingly fast in the most recent three quarters. Many investors likely
expect this to continue as businesses invest furiously in labour-saving and
labour-augmenting technologies. Third, investors are likely surprised at the
resilience of the labour market. Thus,
they possibly expect wage pressure to be persistent even as the Fed keeps
interest rates elevated. As such, they likely believe the Fed can keep rates
high without damaging the economic recovery.
