Job creation surpassed expectations in April

What more can be said about this labor market? Despite a marked slowdown in the pace of growth over the past year and in the face of aggressive Fed tightening aimed squarely at creating even more slack, the labor market continues to plow ahead. The unemployment rate retraced its recent uptick to decline to 3.4% in April, matching its recent January low. The jobless rate hasn’t been lower since 1953.

Job creation again surprised to the upside last month, coming in at 253,000. The silver lining for policymakers seeking a greater slowdown came via sizable downward revisions that shaved nearly 150,000 from previously reported payrolls in the preceding months. The three-month average increase slowed to 222,000 — its lowest level in over two years.

Job creation was reasonably well spread across industries. Despite the notable slowdown in goods demand, the economically sensitive manufacturing sector added 11,000 jobs. By some measures, the housing market is already in recession and significant questions persist about the outlook for commercial real estate. Even so, 15,000 new construction jobs were added last month. Leading the charge once again was the service sector, which added nearly 200,000 new workers.

To be certain, the labor market continues to show signs of slowing from what had been an unsustainable pace. Setting aside the period of stimulus-fueled job creation that put millions of American workers back to work relatively quickly, the recent pace of job creation is still solid relative to longer-term trend growth in the working age population and labor force.

Arguably, even the substantially lower pace of job creation in recent months can’t be sustained with unemployment dipping back to its lowest level in over 50 years. There simply aren’t going to be enough workers available to continue to create jobs at this pace for very long. The challenge is even more acute when inflation enters the equation. If there’s to be any hope of bringing inflation back to a level palatable to the Fed, at a minimum, the pace of job creation will have to slow considerably for some period of time. Still, even that’s unlikely to lift the jobless rate enough in the near term to address the Fed’s inflation mandate.

While far from the only driver of the inflationary surge of the past few years, wage growth has played a role in sustaining it. Average hourly earnings rose by 0.5% in April, which was higher than expectations, lifting the year-over-year increase to 4.4%. The marked decline in job openings and job creation in recent months should alleviate upward pressure on wages as the competition for workers eases.

The Fed’s most recent projections point to a more pronounced increase in unemployment as a byproduct of its tightening measures and efforts to return inflation to — or at least near — the central bank’s 2% target. In practical terms, that would equate to a few million net jobs lost by the end of the year. Whether or not that will come to pass remains to be seen, but the Fed’s recent decision to pause suggests that policymakers believe that the aggressive hikes of the last year have not yet been fully felt across the economy. The combination of higher interest rates and tighter bank lending standards are likely to slow the flow of credit, further weighing on growth. But how soon and to what degree? That remains to be seen. The Fed’s decision to pause acknowledges both the significant interest rate increases that have been implemented thus far and the lag before those hikes are fully absorbed by the economy.

The bottom line? The unemployment rate may or may not have reached its cyclical bottom, but even the recent pace of job creation will be difficult to maintain in an economy challenged by restrictive monetary policy, tighter credit conditions, and a looming showdown over the debt ceiling.