US payrolls growth slowed to 236k in March, down from February’s 326k, indicating the gradual cooling trend in the labor market over the past year, said ABN Amro economists in their recent client note. They point out the unemployment rate declined by one-tenth, to 3.5%, which is close to its all-time low. Wage growth remained benign at 0.3% month-on-month (4.2% year-on-year), adding that weak productivity has led to a surge in unit labor cost growth, causing the labor market to pose upside risks to inflation. As a result, the labor market is loosening but remains exceptionally tight.
Market reaction to the significant drop in JOLTS job vacancies on Wednesday was strong, however, ABN Amro advises treating this particular data with caution as similar large declines in the past have been subsequently revised away. This may reflect the fact that the survey response rate has fallen to a notably low level of around 30%, indicating that the data may not be as reliable as it used to be.
Further evidence of the more gradual slowing in the labor market can be found in other data, such as continuing jobless claims and Challenger job cut announcements, which have been increasing but remain historically low. This underlines the view that the job market is loosening but still remains tight. The continuation of wage growth in US labor markets, while potentially good for workers, has fueled concerns among economists about its impact on inflation. With both food and housing prices rising faster than the US average, higher wages may further fuel these price rises, thus impacting the rate of inflation. However, the potential consequences of higher inflation are not yet clear as the broader economy is still benefiting from stronger global demand and steady growth.
The overall outlook for the US labor market remains uncertain. On one hand, the strength of the job market has been resilient, with the current low unemployment levels usually seen as a harbinger of higher wages and inflation. On the other hand, the sluggishness of wage growth in recent years, even with tighter labor markets, has raised questions about the link between employment and inflation. According to some economists, there may be an explanation in the form of the “transitory” disappearance of certain pressures on labor markets that would normally support stronger wage growth.
The fact that the labor market slowdown is gradual rather than rapid should still provide some reassurance to policymakers and investors. The Federal Reserve, for instance, has continued to signal confidence in the US economy’s ability to create jobs and maintain low levels of inflation despite downside risks. Its decision to keep the federal funds rate unchanged at its June meeting indicates the labor market remains on course to weather any economic headwinds in the near term.
Given the uncertainty surrounding global economic outlooks and fluctuating indicators, investors should monitor trends in the labor market closely. Slower job creation could be a sign that the US economy is hitting a soft patch, and could dampen investors’ optimism about the strength of the expansion. Alternatively, if wage growth continues to outpace inflation, policymakers might be tempted to raise interest rates sooner than anticipated, affecting financial markets.
In conclusion, recent developments in the US labor market reflect a gradual cooling down, with payrolls growth slowing and unemployment hovering near historical lows. While the labor market is loosening, it remains exceptionally tight. Investors should keep a close eye on further trends as they navigate an uncertain economic landscape.
