AFMC - The March Jobs Report Is Just Right

2023-04-07 09:32:27 ET

Summary

• A number too hot will stoke inflation concerns.
• A number too cold will stoke recession concerns.
• We need at least 100,000 jobs a month to absorb population growth.
• This number is just right for a soft landing.

Investors are caught between two sets of worries. The first is that a strong labor market, which puts upward pressure on wages, will keep the rate of inflation elevated and force the Fed to continue tightening monetary policy with higher short-term interest rates. The second is that a weakening labor market will undermine the consumer spending growth that has kept the economy afloat during this inflationary period, resulting in a recession. We needed to see a number that was not too hot or too cold, but just right to balance these two concerns and keep us on track for a soft landing. We got it!

The economy added 236,000 jobs in March, which was modestly below expectations for approximately 250,000 and a step down from 311,00 in February. As I surmised last month, we should see downward revisions to prior months as the establishment survey always overestimates job growth at inflection points in economic growth. The months of January and February saw a combined downward revision of 17,000 jobs. The leisure and hospitality sector continued to lead all sectors in job creation with 72,000 last month. The unemployment rate held steady at a historically low 3.5%.

Wage growth continues to decelerate, largely due to the quality of jobs being created, as some 50,000 were in bars and restaurants. Wage growth fell short of expectations, increasing 0.2% for the month, which translates into a 4.2% annualized rate for all employees on nonfarm payrolls. Additionally, the workweek fell again by 0.1 hours to 34.4 hours in March, which weighs on weekly take-home pay.

These numbers compliment the large drop in job openings to a still elevated level of just under 10 million, as well as the modest uptick in unemployment claims that we saw yesterday using revised methodology from the BLS. This should provide the Fed with enough evidence that the labor market is softening and will continue to do so as rate hikes over the past year work through the economy. I expect Fed officials to conclude at their next meeting that no more rate hikes are necessary, meaning we are at the terminal rate for Fed funds at 4.75-5%.

Expectations for the rate of inflation continue to decline. Last month the Cleveland Fed was estimating that the PCE would fall to 4.51% in March, while the core rate would be 4.74%.

Today those estimates have been revised down to 4.29% for the nominal and 4.6% for the core. Again, the disinflationary trend that started last June is becoming more deeply entrenched, and these labor statistics reinforce that trend.

This jobs report is exactly what the Fed wants to see in order to navigate a soft landing for the economy. We're not seeing an abrupt plunge in job creation or wages, but a very gradual deceleration in both that should tame the inflation beast month after month until we arrive at a range of 2%-3%.

For further details see: