March jobs report shows slowing labor market that policymakers ‘want to see’

Employment increase smallest since December 2020, falling short of expectations

Employers nationwide added just 236,000 jobs in March, a sign that the labor market is cooling amidst the Federal Reserve’s ongoing fight to temper inflation and stabilize the economy.

The pace of job additions itself is still a robust one, remaining above the rate of gains pre-pandemic and helping to bring the unemployment rate back down to 3.5%. It was, however, the smallest gain since December 2020 and did fall in short of expectations: Economists polled by Reuters predicted 239,000 job additions in the month.

Hiring within leisure and hospitality remained healthy, with the sector adding 72,000 jobs. That increase represents a deceleration from January and February, when the segment grew by an average of 95,000 jobs per month, but it remains one of the most consistently strong in terms of hiring in 2023. On the flipside, retail trade employment shed 15,000 jobs, while construction lost 9,000 jobs, likely owing to uncharacteristically warm weather helping boost the sector’s hiring earlier in the year.

With the first three months of employment data now in the books (at least preliminarily), job growth averaged at 345,000 per month, a very stout figure in absolute terms. Moreover, labor force participation is growing, up for a fourth straight month to reach 92.6% — just 0.7 percentage points below where it was before the COVID-19 pandemic.

Still, nonfarm hiring is slowing, while wage growth continued to trend down. Average hourly earnings were up 0.3% in March but has cooled to an annualized rate of 4.2% over the past 12 months and 3.2% over the past three. That movement brings it closer to a range consistent with the Federal Reserve’s stated goal of 2% inflation — a development sure to encourage lending industry stakeholders eager to see the Fed ease off of its hawkish interest rate increase policy.

Sarah House and Michael Pugliese, economists at Wells Fargo, believe that while March’s jobs report likely won’t sway the Fed to pause rate hikes, it’s certainly helping push the central bank in the right direction.

“On balance, this is the type of employment report we believe policymakers at the FOMC want to see: job growth slowing in an orderly fashion, labor supply expanding and wage growth that is edging closer to rates that are consistent with the central bank’s 2% inflation target,” wrote the pair in Wells Fargo commentary. “The inflation fight remains far from finished, but through the month-to-month noise there are leading indicators to suggest progress is being made.

“We remain of the view the [central bank’s Federal Open Market Committee] will hike the fed funds rate by 25 bps at its May 3 meeting, but it could be the last rate hike of the cycle as policymakers keep rates on hold for an extended period of time and let the medicine take.”


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