Job openings declined in March but remain high

In a certain sense, the labor market has been the unofficial last-man-standing in terms of economic uneasiness for some time. While a range of other economic indicators have been showing signs of growing weakness in recent months, job creation and unemployment have pointed to an unflappable labor economy. Evidence of weaker demand haven’t been enough to push companies into more significant layoffs or implementing hiring freezes. Job openings have declined but remain quite high. Further, job creation has come in above consensus expectations 10 out of the last 12 months.

That held true again in March, but just barely — and only if revisions to previous data are ignored. Nonfarm payrolls increased by 236,000 in March, modestly higher than the consensus forecast of 230,000. Revisions to the preceding two months shaved 17,000 to previously reported gains, reducing the net gain to 219,000.

While not as robust as in recent months, net job creation was sufficient to reverse the recent uptick in the jobless rate, which edged back down to 3.5%, close to its cyclical low of 3.4% in January. The unemployment rate hasn’t been below that 3.4% threshold since 1953.

The report affirmed recent data related to job openings and unemployment claims that indicate some softening in conditions. The pace of job creation is clearly cooling, with the March gain representing a 50% decline from January. That slowdown is apparent across industries, but is most pronounced in construction and manufacturing, both of which have cooled considerably in the past year.

Higher interest rates and rising commodity and labor prices have weighed heavily on housing. The hangover effects from the stimulus-fueled consumer spending binge on “stuff” during lockdowns has been readily apparent, as household spending has been reallocated to services, travel, and dining out. A swing from a gain of 41,000 new jobs in January to 7,000 cuts in goods-producing sectors confirms the impact that reduction in demand.

At the same time, the pace of job creation in the services sector accounted for most of the new jobs, while stair-stepping lower in recent months, corroborating other data that points to slower growth in services spending as well.

It comes as no surprise that the economy hasn’t been able to perpetuate the brisk expansionary pace in the immediate aftermath of the 2020 shutdown of the global economy. The question is how much of that decline has been a direct, natural byproduct of the relative normalization of conditions and how much is directly attributable to Fed tightening.

The central bank’s aggressive rate hikes in the past year have been apparent in interest rate-sensitive sectors such as housing but haven’t been fully absorbed into the broad economy. Given the “long and variable lags” in the execution of monetary policy, it’s highly likely that the cooling effect of recent rate increases will become increasingly apparent in the months ahead.

The fact that job creation continues to slow is directionally good news for a Fed that has explicitly stated that greater slack in the labor market is necessary to provide assurance that elevated inflation doesn’t become more deeply woven into the fabric of the economy. Anyone that doubted the resolve of policymakers around knocking inflation down should have had those doubts alleviated in the past month. Even in the face of a bubbling banking crisis and the Fed’s prompt actions to provide liquidity to the financial system to calm financial conditions, they came through with another interest rate hike and a reaffirmation of their commitment to stabilizing prices and returning inflation to their 2% target.

The slowdown in the pace of job creation is a meaningful step, but the Fed will need to see much more softening to seriously contemplate a reversal in rate policy. The March retracement of the unemployment rate back down to 3.5% is wholly inconsistent with the Fed’s goal. Their most recent economic projections, which included an expected unemployment rate of 4.5% at the end of 2023, illustrates this disparity quite clearly.

The March jobs report was the last that will be released before the Fed’s next policy meeting and announcement on May 3. Sticky inflation and persistently low unemployment will weigh heavily on the minds of policymakers, all but assuring another 0.25% increase. After more than a year of rapid policy-tightening, will policymakers conclude that enough has been done? The parsing of the Fed’s May statement and Chair Jerome Powell’s accompanying press conference will be significant, searching for indications of what’s next. In the absence of more tangible progress toward the achievement of the Fed’s dual mandate of full employment in the context of price stability, further rate hikes beyond the May policy meeting can’t be ruled.

The bottom line: Labor conditions are cooling, but the easing is neither rapid enough nor significant enough for the Fed to back away from its tightening bias. The March jobs report all but seals another quarter-point rate hike when the FOMC next meets early next month.

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