Sidelined for longer
Much stronger-than-expected jobs report keeps Fed rate cuts on hold.
Bottom Line
The New York Tristate area experienced a rare 4.8 magnitude earthquake this morning, according to the U.S. Geological Survey. Speculation is running rampant that the tremors were sparked by this morning’s blowout employment report.
Nonfarm payrolls rose by a much stronger-than-expected 303,000 jobs in March (consensus at 214,000, Federated Hermes at 207,000), which is a 14-month high, and previously reported January and February gains were revised higher by a combined 22,000 jobs. The Labor Department today revised February down by 5,000 jobs to a gain of 270,000, while January was revised up by 27,000 jobs to a final gain of 256,000. So, this morning’s flash report for a March gain of 303,000 is adjusted up to a healthy gain of 325,000 jobs.
Private payrolls also rose by a much stronger-than-expected 232,000 jobs in March (consensus at 170,000). January and February were revised modestly higher by 3,000 jobs, which lifts March’s adjusted gain to 235,000 jobs. The difference between nonfarm and private hiring was a sizable gain of 71,000 government jobs in March, which is a three-month high, with 62,000 of those coming at the local and state level.
More good news After job losses in each of the past three months, household employment soared with a gain of 498,000 jobs in March, a four-month high. In addition, the unemployment rate (U-3) ticked down to 3.8%, while the participation rate leapt to a five-month high of 62.7%. Moreover, ADP private payroll hiring in March surged to an eight-month high of 184,000 jobs, initial weekly claims for the March survey week were solid at 212,000, and JOLTS rose slightly in February.
Hot data ices Fed This week’s sizzling employment data continues the trend that started when the March Leading Economic Indicators (LEI) recently posted a positive reading for the first time in 22 months and the ISM manufacturing index popped above the contraction level of 50 for the first time in 16 months.
Federal Reserve Chair Jay Powell said in a speech at Stanford this week that the Fed would remain on the sidelines until it has greater confidence that core PCE inflation is moving substantially down to its 2% target. Fed Governor Chris Waller said last week that the Fed should delay or reduce the number of interest rate cuts from its current forecast of three in the second half of this year. Atlanta Fed President Raphael Bostic said that he’s in favor of only one rate cut later this year, while Minnesota Fed President Neel Kashkari now believes that there may be no rate cuts this year.
Financial markets diverge The bond vigilantes are starting to get the hint, and benchmark 10-year Treasury yields have surged from 3.8% to 4.37% from late December to today. But equity investors continue to whistle past the graveyard, with the S&P 500 soaring by 10% to start 2024. We continue to believe that this imbalance may very well sow the initial seeds of a healthy, much-needed equity market correction in coming months.
Important labor-market indicators were mixed:
- ADP private payroll survey March added a much stronger-than-expected 184,000 jobs (consensus at 150,000), an eight-month high and a powerful 77% increase from depressed November 2023 levels of only 104,000 jobs. Workers who changed jobs last month saw their wages surge by 10% y/y, an eight-month high and a sizable sequential increase over February’s 7.6% gain. Job stayers in March experienced their slowest wage growth in 31 months, an increase of 5.1% y/y that was unchanged from February.
- Initial weekly jobless claims The March survey week for this high-frequency leading employment indicator rose by 6% m/m to a relatively low 212,000 claims for the week ended March 16, while the smoother four-week moving average of 211,750 claims for the same week was down slightly from February. Continuing claims of 1.791 million for the week ended March 23 are at a six-week low.
- Challenger job cuts March layoffs hit a 14-month high at 90,309, which rose by 6.7% m/m and by a modest 0.7% y/y. Government layoffs of 36,000 workers (40% of total layoffs) dominated this category, with technology companies at 14,224 layoffs (16%).
- Job Openings & Labor Turnover Survey (JOLTS) February job openings rose marginally to 8.756 million (consensus at 8.73 million), compared with a downwardly revised 8.748 million in January. That’s 28% below a record 12.182 million job openings in March 2022. The job openings rate remained unchanged for the third consecutive month at 5.3%, just off a three-year low of 5.2% in October 2023. The ratio of job openings for every unemployed worker was unchanged at 1.4 for the fifth consecutive month, down from a peak of 2.0 in March 2022. The number of voluntary quitters rose modestly to 3.484 million in February, just off a nearly three-year low, and the quits rate remained unchanged for the fourth consecutive month at a cycle low of 2.2%, which suggests that workers remain less confident in their ability to switch jobs. This metric peaked at 3.0% in April 2022.
Wage inflation moderates while hours worked rise Average hourly earnings rose by an in-line 0.3% m/m in March and by an in-line 4.1% y/y, down from 4.3% in February. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked rose by an in-line 34.4 in March, up from 34.3 in February and 34.2 in January. Each change of 0.1 hour worked is the equivalent of adding an estimated 350,000 jobs to the economy. This is important, as employers tend to adjust hours before they adjust staff.
Unemployment rate declines, labor impairment steady, and participation rate rises Household employment (an important leading employment indicator) rose for the first time in four months, adding 498,000 jobs in March, after shedding 184,000 jobs in February, 31,000 jobs in January and a much larger loss of 683,000 jobs in December, its single worst month since April 2020.
The number of unemployed people declined by 29,000 workers in March, its third decline in the last five months, compared with an increase of 334,000 in February. So, the official unemployment rate (U-3) ticked lower to 3.8% in March, down from a two-year high of 3.9% in February, but still higher than 3.7% in January and April’s 53-year low of 3.4%.
The labor impairment rate (U-6) was unchanged in March at 7.3%, up from 7.2% in January, 7.1% in December and 7.0% in November, all well above the cycle low (dating back to 1994) of 6.5% in December 2022. The civilian labor force soared by 469,000 jobs in March, up from a gain of 150,000 workers in February and declines of 175,000 in January and 676,000 in December. The participation rate leapt to 62.7% in March, up from 62.5% in February, but still down from 62.8% in November, which matched a post-pandemic high. The pre-pandemic cycle high was 63.3% in February 2020.
K-shaped recovery narrows sharply The unemployment rate for highly educated workers ticked down to 2.1% in March, although still above September 2022’s cycle low of 1.8%. But the unemployment rate for less-educated workers inexplicably plunged to 4.9% in March from 6.1% in February, although it is still above its 31-year low of 4.4% in November 2022.
Sector details mixed:
- Temporary help (an important leading employment indicator) lost 1,000 jobs in March for the thirteenth time out of the past fourteen months.
- Manufacturing employment was unchanged in March (consensus gain of 3,000), while February was revised down from a preliminary loss of 4,000 jobs to a larger loss of 10,000. January was revised down to a modest gain of 6,000. The ISM manufacturing index surprisingly surged to 50.3 in March, up from 47.8 in February. This was the index’s first gain above the 50-contraction level over the past 16 months.
- Construction added 39,000 jobs in March, versus 26,000 jobs in each of February and January, as the difficult winter weather improved over the back half of the first quarter.
- Retail added 18,000 jobs in March, versus gains of 23,000 in February, 17,000 in January, and 32,000 in December. We’re expecting a rebound in March retail sales from poor January and February levels. Retail lost 43,000 jobs in November and added only 1,000 jobs in October, and sales rose by only 2.7% during the 2023 Christmas season (compared with 7.2% in 2022), marking the weakest Christmas retail season in five years.
- Leisure & hospitality rose by 49,000 jobs in March, compared with a gain of 43,000 jobs in February and a loss of 3,000 jobs in January.