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April 1st employment report was no joke: the labor market is tightening

The U.S. economy added 431,000 jobs in March and February job estimates were revised higher, pushing the 3 month average gain to 562,000. Unemployment ticked down to 3.6 percent, indicating a tightening labor market. Gains in Leisure and Hospitality sector alone added 112,000 jobs. Participation rates improved, increasing to 62.4 percent but still a full percentage point below pre-pandemic levels.

Fed has ammunition for a 50 basis point hike in May and maybe even in June

With another strong labor report, the Federal Open Market Committee (FOMC) should focus on both parts of their dual mandate. The accelerating pace of inflation is an obvious concern for committee members and a tightening labor market adds fuel to the fire. For the Fed, the “goldilocks scenario” is long run unemployment hovering around 4 percent – not too low to spark wage inflation and not too high to signal a weakening economy. In March, unemployment fell 0.2 percentage point to 3.6 percent. If the labor market continues to tighten, the FOMC could front-load the tightening cycle by hiking rates by 50 basis points in both the May and the June meetings.

Watch revisions for underlying trends

During times of possible economic inflection points, the direction of data revisions are important. This morning, the Bureau of Labor Statistics (BLS) upwardly revised both February and January. Together, the previous two months were revised up by 95,000. These revisions are especially bullish for markets since the Omicron variant stifled economic activity in January and the Russian invasion of Ukraine increased global uncertainty in late February. And yet, job gains were larger than initial estimates.

One sour note is the effective cut in real wages

Average hourly earnings rose in March by 5.6 percent from a year ago. The year over year increase was the highest since May 2020 but not keeping up with inflation. Headline CPI for March rose 7.9 percent from a year ago. The conundrum for policy makers is getting wages up high enough for consumers to endure the inflationary storm yet stable to minimize further inflation pressures.

Job gains were broad based.

March jobs gains were broad based. Service-providing sectors gained the most as pandemic effects wane. Retail trade added 49,000 jobs, Professional and business services added 102,000 jobs and Leisure and Hospitality added 112,000 jobs. Construction employment is now back to February 2020 levels. Restaurants alone added 61,000 jobs.

“The March jobs numbers are strong enough to support a 50 basis point hike in May as the FOMC will front-load their tightening path,” said LPL Financial Chief Economist Jeffrey Roach.

As shown in the LPL Chart of the Day, gains are mostly in service producing sectors. The three-month moving average job gain is now a robust level of 562,000. The reopening process is supporting the services sector and hiring in services industries like leisure and hospitality strongly contributed to the headline gain in employment. This latest release from the Bureau of Labor Statistics will encourage the FOMC to decidedly tackle inflation by hiking 50 basis points in May.

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This entry was posted on Friday, April 1st, 2022 at 2:25 pm. Both comments and pings are currently closed.

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