ACTV - March Employment Report: Still Inflationary

2023-04-07 13:25:50 ET

Summary

• The March employment report showed job creation slowed, but it still remains above 2018 and 2019 levels.
• Labor force participation has improved, but remains a problem.
• Wage growth continues to moderate, but remains elevated.

Earlier this morning, the Bureau of Labor Statistics released the employment report for the month of March. The economy generated 236,000 new jobs in the month of March and the unemployment rate dropped from 3.6% to 3.5%. Coming into this report, the labor market was extraordinarily tight with ongoing labor shortages. While the March report shows some easing of those forces, I believe the current trend is toward normalcy with no real signs of influencing a rate cut by the Fed.

While a 236,000 month of job creation is lower than February or January, it's important to point out that level is still higher than the average monthly job creation in 2018 or 2019. In fact, the three month and twelve months average are similar at 345,000, which is double the monthly gains made in 2019. The unemployment rate of 3.5% is still far below the Federal Reserve's target of 4.5% for 2023, highlighting how far off the labor market is from requiring easing from the Fed.

Another measure to highlight the tightness of the labor market is the duration of unemployment. If the labor market began to cool off, it would take longer for newly unemployed workers to find jobs. While the average length of unemployment and the number of unemployed workers over 27 weeks both ticked up in March, their levels remain below any measurements made during the previous business cycle (2009-2020).

By analyzing job openings less the number of unemployed, we also can get a good picture of how tight the employment market is. While March job openings data is not available, February's report was recently released. According to the February report, there were 4 million more job openings than unemployed people. While that number has improved from 6 million in March 2022, it's a far cry from parity in the labor market.

One last beacon of hope for the labor market to normalize is to have those who left the labor force during COVID re-enter. When COVID first hit, the number of adults not in the labor force jumped from 95 million to 103 million. While the adult population not in the labor force has fallen to 99.5 million, it's important to note that this measure has varied between 99.1 and 100.8 million since June 2020 with no real pattern developing.

I believe we have neared a peak in labor force participation based on the demographic data within the employment. For example, the labor force participation for 25 to 54 years old is currently 83.4%, 0.3% higher than it was before the pandemic. The labor force participation for 55 years and up is at 38.6%, which is 170 basis points lower than before the pandemic. The data points to a clear picture; older workers left the labor force (likely retired) when the pandemic hit, and they are not coming back.

In terms of the inflationary outlook, the Fed looks closely at the changes in average hourly earnings to see how changes in prices will be affected. Fortunately, wages continued to moderate as average hourly earnings were up 5.1% year over year for the month of March, the lowest reading since July 2021. Since average hourly earnings and CPI have been closely correlated as of late, I believe that core CPI will be between 5.3% and 5.5% for March, still far above the Fed's targets.

Nothing in the jobs report supports a hold in interest rates for the Fed, let alone an easing. The demand for labor still needs to decrease by approximately 4 million jobs (or 2.5% of the market) and wages still need to cool further before providing a disinflationary influence on prices. Until then, an inflationary presence remains on the employment side of our economy.

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