Labor market not slowing down
Fed on pace for half-point hike in May.
Published April 1 2022
Bottom Line
The labor market in March did its best impression of a Timex wristwatch commercial from the 1950s, when pitchman John Cameron Swayze bragged, "It takes a licking and keeps on ticking." Today’s employment report posted numbers at odds with the Russian/Ukraine war, the worst inflation in 40 years, the highest gasoline prices on record and the Federal Reserve’s hawkish shift to produce solid results across the board.
The nominal gain of 431,000 nonfarm jobs was below the Bloomberg consensus for 490,000, but right in line with our forecast here at Federated Hermes for an increase of 423,000. The Labor Department revised January and February results higher by a combined 95,000 jobs, which offset the headline miss.
The household survey added a strong 736,000 jobs, which helped to push the unemployment rate to a post-pandemic cycle low of 3.6%, while the participation rate inched up to a new cycle high of 62.4%. Wages grew 0.4% month-over-month in March, which drove pay up 5.6% year-over-year (y/y), the strongest increase in nearly two years.
Fed quickens Nominal CPI inflation surged 7.9% y/y in February, a growth rate we expect to rise to 9-10% in coming months. This means the average wage earner has lost at least 2.3% in purchasing power over the past year.
We expect this situation to worsen in coming months, as energy prices remain elevated due to the war in Ukraine and the sanctions on Russian energy production, creating a supply/demand imbalance. Companies continue to pass these higher labor, shipping and commodity costs onto their end customers, which creates a self-reinforcing inflationary cycle, at least as long as we agree to pay them. But with the savings rate falling to a cycle low of 6.3% in February, the situation may moderate in coming months.
Regardless, we expect the Fed to accelerate its pace of rate hikes in coming months. It completed its bond-buying program last month and executed a quarter-point rate hike (its first in four years) at the Federal Open Market Committee meeting on March 16. But with inflation and gas prices surging alongside a strong labor market and sharply rising wages, we expect the Fed to substitute a series of half-point hikes at their May 4 and June 15 meetings. That would be their first such jump in more than 20 years.
Unemployment and labor impairment rates fall, participation rate rises The household survey rose for the ninth consecutive month in March by a strong 736,000 jobs versus 548,000 in February, while the number of unemployed people fell by 318,000, compared with a decline of 243,000 in February. As a result, the unemployment rate (U-3) fell to a new cycle low of 3.6% last month, down from 3.8% in February. We are rapidly approaching the U-3’s pre-pandemic, half-century cycle low of 3.5%, achieved in February 2020. The labor impairment rate (U-6) plummeted to 6.9% in March from 7.2% in February. And the civilian labor force rose by 418,000 people in March, compared with a gain of 304,000 workers in February, driving the participation rate up a tick to a new cycle high of 62.4% in March.
ADP, claims and JOLTS all remain strong The ADP private payroll survey rose by a slightly stronger-than-expected 455,000 jobs in March (consensus at 450,000 jobs), while February was revised somewhat higher to a gain of 486,000 jobs. This included a strong rebound in hiring at small companies, which are the engine of employment growth in the U.S. economy. Two weeks ago, initial weekly jobless claims fell to their lowest level since 1969 at only 188,000, while continuing claims at only 1.3 million also set a post-pandemic low. The lagging Job Openings & Labor Turnover Survey (JOLTS) rose to a stronger-than-expected 11.27 million open jobs in February (just off December’s record high of 11.45 million openings).
All told, the labor market is very tight, witnessed by the 1.8 job openings for every unemployed worker, the most in two decades. Voluntary quits rose to 4.4 million workers (just off November’s record 4.5 million), with a near-record record quits rate of 2.9% (3% in November), as the “Great Resignation” continues. Employers laid off or fired just 1.4 million workers in February (versus 1.2 million in December, the fewest on record).
K-shaped recovery pauses The unemployment rate for low-wage-earning workers rose to 5.2% in March, compared with a 30-year low of 4.3% in February and 6.3% in January, as people have re-entered the labor force as government benefits have faded. High-wage-earning workers saw their unemployment rate fall to 2% in March from 2.2% in February and 2.3% in January.
Sector details solid The manufacturing sector added a stronger-than-expected 38,000 jobs in March (consensus at 32,000), matching February’s gains but up from 26,000 new workers in January. Construction hiring added only 19,000 jobs in March, down from a gain of 57,000 workers in February but up from a tepid, weather-impaired gain of only 6,000 in January. Christmas sales were robust (up 16.4% y/y), and retailer hiring has been on fire, adding 49,000 in March and an upwardly revised 110,000 in February and 121,000 in January. Temporary hiring, a leading indicator of employment trends, added 5,000 in March, 43,000 in February and 28,000 in January. Leisure & hospitality remains the strongest category, adding 112,000 in March, 154,000 in February, 138,000 in January, 186,000 in December and 191,000 in November.
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