The US Labor Market Can Add Jobs and Wage Growth Can Cool at the Same Time
Economic news and commentary for April 7, 2023
US Employment
The US added 236,000 in March, another strong month of job gains despite the clear downshift in hiring. After this release, we find that over 1 million jobs were added in Q1 2023, smashing opinions that there has been significant easing in the labor market. The robust employment increase also came with a slight -0.1 ppt decrease in the unemployment rate which is now at 3.5%. This occurred despite another strong increase in the labor force where 480,000 individuals reentered and increased the labor force participation rate by 0.1 ppts to 62.6%. While this is still -0.7 ppts below the pre-pandemic level of 63.3%, it’s a significant movement against labor shortages which has created problems for businesses that reported they could not find enough staff. Once again, the leisure and hospitality sector took the lead adding 72,000 jobs with the government (+47,000), health care (+34,000), and professional & business services (+34,000) seeing around half of that growth. Most of the other industries saw little change in employment. The strongest decline was in retail where -14,500 jobs were lost.
Fading labor market tightness has led to some easing in wage growth. After the annual rate accelerated to 4.6% YoY in February, the growth of average hourly wages was 0.3% MoM and slowed to 4.2% YoY in March. This is the lowest reported annual increase since June 2023 (3.9% YoY). Importantly, we saw a slow pace of growth in service sector wages. Goods sector wages grew 0.5% MoM and 4.6% YoY, and services sector wages grew 0.2% MoM and 4.2% YoY. For the first quarter as a whole, we can see that wage growth decelerated significantly. The annualized rate of growth of average hourly wages in Q1 2023 was around 3.8%, which is down from the 4.6% rate in Q4 2022. This is the lowest annualized wage growth for a quarter since Q4 2020 and is in-line with some pre-pandemic quarters like Q3 2019 and Q1 2018 at 3.7%.
Job gains are definitely slowing but at a much more gradual pace than previously expected. A one million-plus job gain in Q1 2023 would have been thought to be a fantasy if you had told someone about it when the Fed first started its hiking campaign against sharply higher inflation rates. But here we are. It is also crucial that the labor force has increased alongside the increase in employment since it’s the only way that the labor market can loosen without seeing significant increases in unemployment. In the last two months, the labor force has grown by around 900,000 individuals, just 100,000 short of the total number of jobs added. At first glance, it seems like the Fed will have to be more hawkish because of the strong headline employment increase, but an improving labor force and momentum falling out of wage growth says otherwise. The Fed may want to tie loose ends with a final rate hike in May, but after that, there should be a clear path to pausing for a bit to consider financial stability concerns and rate cuts that may come down the road.
Still to come…
3:00 pm (EST) - US Consumer Credit
Morning Reading List
Other Data Releases Today
Japenese real consumption grew 1.6% YoY in February, up from -0.3% YoY in January. Nominal incomes were up 3.1% YoY, but real incomes were actually down -0.8% YoY and disposable income down -1.0% YoY as inflation starts to ramp up in Japan.
The latest S&P Global Sector PMI data signalled that the Tourism & Recreation sector led a pick-up in global business activity at the end of the first quarter of the year, with almost all monitored categories in expansion territory. The only
exceptions were Forestry & Paper Products and Chemicals as Basic Materials sectors remained under pressure.
Canada Employment
Canadian employment (Mar): Solid, but narrow (CIBC) - The solid hiring to start 2023 continued in March, with a 35K increase in employment easily outstripping consensus forecasts for a modest 7.5K gain. However, job gains were narrower by sector than they had been in prior months, with the overall increase driven by strong hiring in only three areas (transportation, business services and finance).
Canada's labour market surges again (TD Bank) - The Canadian jobs market shows no sign of slowing. Today's gain of 35k jobs extends the streak of monthly employment gains to seven months, bringing the tally to 382k jobs gained over that time. Looking beyond the headline, the fundamentals remain solid. Workers continue to clock in more hours every week and their wages are rising. With all the jobs gained in the private sector (although nearly half were part-time), there is strong underlying momentum that continues to build in the Canadian economy.
US
US Economic Outlook April 2023 (EY Parthenon) - The combination of persistently elevated prices, high interest rates and now tightening credit conditions will weigh on business investment, consumer spending and the transactions markets in the coming months. As I’ve stressed before, even though we do not see evidence of broad-based economic imbalances, recessions are often nonlinear psychological events. We continue to see signs of a midyear recession.
US: Credit crunch in the making? (Allianz) - The US economy has been remarkably resilient to the sharpest monetary tightening in decades. While the housing market started feeling the pinch as early as summer 2022, GDP in the first quarter of 2023 is expected to show robust underlying domestic demand, buoyed by robust consumer spending.
U.S. Banks’ Exposures to Climate Transition Risks (NY Fed) - We build on the estimated sectoral effects of climate transition policies from the general equilibrium models of Jorgenson et al. (2018), Goulder and Hafstead (2018), and NGFS (2022a) to investigate U.S. banks’ exposures to transition risks. Our results show that while banks’ exposures are meaningful, they are manageable. Exposures vary by model and policy scenario with the largest estimates coming from the NGFS (2022a) disorderly transition scenario, where the average bank exposure reaches 9 percent as of 2022.
Bullard Speaks about Financial Stress and the Economy (Jim Bullard, St Louis Fed) - St. Louis Fed President Jim Bullard presented “Financial Stress and the Economy” at a meeting of the Arkansas Bankers Association in Little Rock. He said that financial stress has been on the rise in recent weeks, but the macroprudential policy response has been swift and appropriate. He added that regulators are prepared to take additional steps if needed. Data on the real U.S. economy have generally been stronger than expected, and inflation remains too high, Bullard said. He pointed out that FOMC policy has kept market-based measures of inflation expectations relatively low, which bodes well for disinflation this year. Continued appropriate macroprudential policy can contain financial stress, while appropriate monetary policy can continue to put downward pressure on inflation, he said.
Eighth District Businesses Report Persistent Inflationary Pressures (St Louis Fed) - The St. Louis Fed’s survey shows that businesses expect inflation to persist but are more reluctant to raise the prices they charge their customers.
The “Abundant Reserve” System Crushes the Fed (First Trust Portfolios) - Fifteen years ago, in 2008, the Federal Reserve started an experiment in monetary policy, switching from a “scarce reserve” system to one based on “abundant reserves.” This switch has created massive problems that are hitting not just the private banking system but the Fed itself.”
The Digital Dollar's Difficulties (Northern Trust) - At the outset, some of you are probably wondering whether a digital dollar is already here. Electronic transactions dominate commerce, to the point where an increasing number of businesses have gone cashless. But your payments at points of sale still have to pass through an interchange process that adds an average of 2% to the cost of transactions in the U.S. The interbank settlement process operates overnight, relying on decades-old protocols designed for checks.
States and Construction Trades Most Reliant on Immigrant Workers, 2021 (NAHB) - Earlier this year, we published a post highlighting a continuing high reliance of construction on immigrant workers post pandemic. Immigrants make one in four construction workers. The share is significantly higher, reaching 30%, among construction tradesmen. In some states, reliance on foreign-born labor is even more pronounced with immigrants comprising close to 40% of the construction workforce in California and Texas.
State fiscal reserves at historic highs ahead of impending slowdown (S&P Global) - Following the deceleration in growth that occurred over the course of 2022, state tax-collection gains will likely remain modest in the near term as rising interest rates and persistently high inflation slow economic activity considerably. In addition to the downward pressure created by macroeconomic conditions, 31 states have enacted changes that will lead to a net decrease of $16.2 billion in revenue (1.4% of forecast general fund revenues) in fiscal 2023, per the National Association of State Budget Officers (NASBO).
Europe
The growing role of investment funds in euro area real estate markets: risks and policy considerations (ECB) - This article analyses the financial stability risks of investment funds active in euro area commercial real estate (CRE) markets. It finds that real estate investment funds (REIFs) have grown significantly in the past decade, and have a large market footprint in several euro area countries where the outlook for CRE markets has deteriorated sharply.
Eurozone GDP contraction taking shape (ABN AMRO) - Economic data for the eurozone and Germany that was published during the past few days indicate that eurozone GDP contracted in 2023Q1 but also that the composition of growth has changed compared to 2022Q4.
China
Brazil–China strategic partnership (S&P Global) - On March 29, 523 business representatives from the Brazil and mainland China gathered for the Brazil-China Economic Seminar in Beijing. One of the outcomes was the signature of 20 agreements to facilitate and expand Brazil-China bilateral trade and relations.
Canada
How bad is the good news? (CIBC) - In this topsy-turvy world, good news for the economy isn’t really what we’re looking for. If the slowdown that central banks
are aiming at fails to materialize, that could force yet more rate hikes, and risk a harder landing. So how bad is the good news we’ve been hearing about the Canadian economy through its first few months of 2023 from the perspective of our own central bank?
Inflation
MCT Update: Inflation Persistence Declined Modestly in February (Liberty Street Economics, NY Fed) - This post presents an updated estimate of inflation persistence, following the release of personal consumption expenditure (PCE) price data for February 2023. The estimates are obtained by the Multivariate Core Trend (MCT), a model we introduced on Liberty Street Economics last year and covered most recently in a February post. The MCT is a dynamic factor model estimated on monthly data for the seventeen major sectors of the PCE price index. It decomposes each sector’s inflation as the sum of a common trend, a sector-specific trend, a common transitory shock, and a sector-specific transitory shock. The trend in PCE inflation is constructed as the sum of the common and the sector-specific trends weighted by the expenditure shares.
More Bread For Our Daily Bread (Northern Trust) - Around the world, trips to restaurants and grocery stores are stressing household budgets. Prices of food have been increasing at double- and even triple-digit rates in some locations. Low income economies, where food constitutes a relatively large share of the consumer price basket, are struggling the most. However, the developed world hasn’t been immune. Annual food inflation hit a 45-year high of 18% in the U.K. and a record high of 15% in the eurozone. Though decelerating in the U.S., inflation in the essentials is hovering at rates last seen in the early 1980s.
Oil Prices: Fueling Inflation? (Northern Trust) - This week began with an announcement that the Organization of Petroleum Exporting Countries (OPEC) will be decreasing output. The cut of over one million barrels per day follows a prior drop of two million barrels in October 2022, reducing the global flow of crude by about 3% in total.
Outlook
Week Ahead Economic Preview: Week of 10 April 2023 (S&P Global) - The coming week sees important updates to inflation rates in the US, mainland China and Eurozone, as well as the release of minutes from the latest rate-hiking FOMC and ECB meetings. Policymakers at the Bank of Canada meanwhile gather to set rates. Also look out for UK GDP and Eurozone industrial production data, as well as updated US retail sales and mainland China's trade numbers.
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