US Labor Market Cools Off After Less-Than-Expected 175,000 New Jobs
US Labor Market Cools Off After Less-Than-Expected 175,000 New Jobs

By Andrew Moran

The U.S. labor market showed further signs of cooling down after the economy added a smaller-than-expected 175,000 new jobs last month, down from 315,000 in March, according to the Bureau of Labor Statistics (BLS). The market had penciled in a reading of 243,000 positions.

In April, the unemployment rate shot up to 3.9 percent, up from 3.8 percent and slightly higher than the consensus estimate of 3.8 percent.

Average hourly earnings rose at a smaller-than-expected pace of 0.2 percent, down from 0.3 percent. On a year-over-year basis, average hourly earnings decelerated to 3.9 percent, falling short of the market forecast of 4 percent.

The labor force participation rate was unchanged at 62.7 percent, while average weekly hours dipped from 34.4 to 34.3.

Health care led the employment gains last month, with 56,000 new jobs. This was followed by social assistance (31,000), transportation and warehousing (22,000), and retail (20,000).

Government and manufacturing payrolls each rose 8,000.

The number of people working two or more jobs fell to 8.383 million, from 8.476 million. The number of individuals working part-time for economic reasons climbed 86,000 to 3.058 million.

Full-time employment surged by 949,000, while part-time jobs declined by 914,000. For the past year, there had been a divergence in job creation as part-time growth substantially outpaced full-time gains.

The gap between U.S.- and foreign-born workers extended in April. U.S. employment gains were little changed compared to the same time a year ago, but native-born employment surged to 31.726 million.

Revisions continue enjoying the spotlight in the federal government’s jobs data.

March job gains were revised up by 12,000 to 315,000, while the February report was adjusted down by 34,000 to 236,000.

Last month, the Business Employment Dynamics (BED) report showed that the U.S. economy lost 192,000 jobs in the third quarter of 2023. By comparison, the monthly non-farm payroll data showed the labor market adding 494,000 new positions in the same quarter.

Based on the monthly jobs report, there have been a total of more than 600,000 downward revisions of jobs since January 2023.

Market Reaction

Financial markets rocketed following the latest jobs data before the opening bell, with the Dow Jones Industrial Average popping more than 500 points.

U.S. Treasury yields tanked across the board. The benchmark 10-year yield fell below 4.48 percent. The 2-year yield plunged to 4.76 percent, while the 30-year bond slipped to around 4.64 percent.

The U.S. Dollar Index (DXY), a gauge of the buck against a basket of currencies, crashed below the 105.00 mark.

Investors are hoping that a deterioration in labor conditions could force the Federal Reserve’s hand and encourage policymakers to cut interest rates. However, according to Giuseppe Sette, the president of financial market research firm Toggle AI, “the current outlook remains for no cuts in 2024.”

“For once, we got a Non-Farm Payrolls read below expectations—right after the Fed told us they are on hold about rate cuts,” he said. “But one data point does not change policy, especially when it is so volatile as NFP. The current outlook remains for no cuts in 2024.”

The outlook for the labor market suggests “some softening,” says Mark Hamrick, the senior economic analyst at Bankrate.

“The outlook remains for some softening in the job market over the next year as high interest rates weigh on demand,” he said. “The fact remains that the job market has remained more robust and resilient than had been expected.”

Will it be enough to cut rates?

“Rate cuts now appear to be slated for late in the third quarter or in the fourth quarter, if at all this year,” Mr. Hamrick stated. “The data will need to align for the Fed to gain confidence that inflation is getting closer to its 2% target before pulling a rate cut trigger. It remains on high alert for unacceptably high inflation.”

The futures market is now penciling in two quarter-point rate cuts this year, beginning in September.

Deep Dive Into Latest Labor Data

At this week’s press conference following the Federal Reserve’s policy meeting, Chair Jerome Powell asserted that the labor market is showing signs of cooling down, though it remains strong.

“Demand is still strong, but it’s cooled from its extremely high level a couple of years ago,” Mr. Powell told reporters.

Market watchers were given a treasure trove of labor data to assess the current employment situation accurately.

The first significant finding in recent days has been the reacceleration in labor costs.

In the first quarter, the employment cost index (ECI), a gauge of benefits and wages—climbed to 1.2 percent, up from 0.9 percent in the fourth quarter. This was higher than the market forecast of 1 percent. On a year-over-year basis, the ECI rose by 4.2 percent.

Additionally, during the January to March period, unit labor costs rocketed by a higher-than-expected 4.7 percent, up from 0 percent in the final three months of 2023. Economists had penciled in a reading of 3.3 percent.

Labor productivity was little changed, rising 0.3 percent, a smaller-than-expected pace compared to the upwardly revised 3.5 percent increase in the previous quarter.

The number of job openings tumbled by 325,000 in March to 8.488 million, the lowest level since February 2021. This fell short of the market projection of 8.69 million. Job quits also edged lower by nearly 200,000 to 3.329 million.

Employers, particularly small business owners, are becoming “much more defensive” in their hiring endeavors, says Andrew Crapuchettes, the CEO of RedBalloon.

“Private sector employers are holding their cards, waiting to see which way the economy moves,” said Mr. Crapuchettes in a statement. “Small business owner sentiment took quite a turn about two months ago, moving from cautious optimism about growth to a much more defensive stance. Employers told us they are shelving hiring plans and reserving cash.”

This was also consistent in the April Challenger data that showed U.S.-based employers announced plans to cut 64,789 jobs. Although this is down 28 percent from the 14-month high observed in March, the numbers suggest more companies are slowing their hiring efforts and trimming their payrolls amid rising labor costs.

But while employment opportunities have diminished, the private sector still added a higher-than-expected 192,000 new jobs in April, according to the ADP’s National Employment Report. This exceeded the consensus estimate of 175,000.

Nela Richardson, the chief economist at ADP, noted that hiring was “broad-based,” led by gains in leisure and hospitality (56,000), education and health services (26,000), and professional and business services (26,000).

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