Another Stout Jobs Report for March

Scott Anderson
Chief Economist
Bank of the West

Nonfarm employment growth slowed to 236k in March, just a touch below our estimate of 250k and nearly in-line with the consensus forecast of 230k. While showing some signs of moderation around the edges, employment growth overall remains stronger than the Fed would like to see if it is to achieve its 2.0% inflation target over the medium-term. Indeed, February's employment gain was revised up by 15k job to 326k, and for the first quarter of 2023 as a whole, nonfarm employment increased by a robust 1.034 million jobs. To give you some perspective, there have been expansions in the recent past where economists were happy to see 1.5 to 2.0 million jobs created in a whole year in the United States.

More Than A Million Net New Jobs Created in Q1

To underline how tight the U.S. labor market remains, the unemployment rate managed to drop back to 3.5% from 3.6% in February. This brings the unemployment rate back down near its 54 year low of 3.4% reached in January. Employment from the Household Survey that is used to calculate the unemployment rate increased by an even stronger 577k in March and jumped by 1.65 million in the first quarter of 2023 alone.

Job Gains From The Household Survey Even Stronger

Indeed, based on the yardstick of the U.S. unemployment rate alone, the 475 basis points of Fed rate hikes over the past twelve months have not even had a noticeable impact. In fact the unemployment rate today is lower than it was in March 2022 when the Fed started its aggressive monetary tightening campaign.

Unemployment Hasn't Budged Since Fed Hikes Began

So where is the softening around the edges you ask? Employment growth among goods producers is on the decline, falling by 7k jobs in March, with construction shedding 9k and manufacturing losing a net 1k jobs. Temporary help employment fell by 11k. Temporary help positions are often some of the first to go, when demand slackens. Retail is another sector showing increased signs of stress. Retail employment fell by 15k jobs with building material and garden stores cutting 9k jobs and furniture, home furnishings, electronics, and appliance retailers losing another 9k jobs. Perhaps a sign that consumer spending and the outlook for consumer spending may be deteriorating. Financial services shed 1k jobs as well as financial stress in the banking system mounts.

On a brighter note, private service producers continue to create the bulk of net new jobs up 196k in March, but that is down by about a third from January's pace. Leisure and hospitality continues to lead the way, adding another 72K jobs, while education and health care remained strong adding another 65k net new jobs. Professional and business services (+39k) and government (+47k) also had respectable showings last month on the job creation front.

The Fed will be somewhat relieved that the pace of average hourly earnings growth continues to moderate. From a year ago, average hourly earnings growth fell to 4.2% and over the last three months has averaged an even smaller 3.8% annualized pace. This moderate pace of earnings growth is nearly back down to what the Fed would need to see on a sustained basis if it is to take wage inflation and a potential wage-price spiral out of the inflation equation. Labor force participation also improved to 62.6% from 62.5%, the highest level of participation since the first month of the pandemic. More labor market participation should help rebalance labor supply and demand. It also means all the rebalancing doesn't necessarily need to come from lower labor demand.

Bottom-line, the March Employment report shows some softening in the U.S. labor market is finally underway, but more softening will be required to completely bring labor market supply and demand into balance. Without further rebalancing, the Fed may only be partially successful in returning inflation back to its 2.0% target in a timely fashion. At the margin, the Fed will see this report as only a partial success in achieving their inflation objective and that more work on rebalancing the labor market will be needed in the months ahead. While a close call, we think another 25 basis point hike at the May FOMC is still more likely than not. Nothing in today's jobs report changes that view. It also means that recent market fears of an imminent hard landing for the U.S. economy and expectations for sharp Fed rate cuts before the end of this year may once again be premature.

To learn more, check out this week's U.S. Outlook Report.


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