U.S. Labor Market Has Yet To Get Powell's Memo

Federal Reserve Chair Jerome Powell this week laid out a hoped-for evolution of the U.S. job market that included a rising labor participation rate that would pave the way for continued job growth while tapping the brakes on the pace of wage increases.

The prospect of more Americans entering the workforce, he told reporters after the end of a two-day policy meeting, would help the U.S. central bank tame high inflation without a large increase in joblessness.

The release of the Labor Department's April nonfarm payrolls report on Friday offered little immediate sign that Powell's message had been received: businesses added another 428,000 jobs, the labor force declined and wages grew at a rapid, 5.5% annual pace.

Still, economists said the report may show the start of the sort of adjustment the Fed chief hopes to see:

STRONG JOB GAINS, EASING WAGE GROWTH

When all is said and done, the Fed wants more people working one month to the next. Despite the discussion about businesses struggling to hire, the fact that payrolls rose by more than 400,000 for a 12th straight month is a plus.

The gain brought the U.S. economy a step closer to recovering its pre-pandemic employment level, with just 1.2 million remaining positions to reach that goal - and just 500,000 in the private sector. The country may even get back to its prior trend level next year. That means more household income and, all things equal, a more resilient economy.

Graphic- The jobs hole facing Biden and the Fed:

Even more to Powell's liking, the monthly pace of wage growth appears to be easing. At an average 0.3% over the last three months, the pace is the lowest in a year.

"Today's employment report is consistent with a soft-landing scenario. Solid job gains ... yet despite that we are seeing a moderation in average hourly earnings," said Ellen Gaske, lead economist at PGIM Fixed Income. "We have unwound the surge that we saw toward the end of last year."

Graphic- Wage growth moderates:

PEAK MISMATCH?

Powell has focused on the outsized numbers of job openings compared with the ranks of the unemployed, a mismatch of historic proportions with nearly two vacancies for each person who is unemployed.

Gaske believes that is almost certainly tied to the COVID-related disruptions and the equally disruptive reopening of the economy.

"If you wanted to open your doors, you had to hire somebody," she noted, a situation that also made companies "pretty insensitive to wage increases."

At this point, the dynamics may be shifting, particularly with high inflation and market volatility leading to more caution when it comes to hiring plans.

Payroll provider UKG, which tracks shift work in real time, noted that in late April, after the Labor Department surveys for that month's jobs report had been completed, demand for workers slipped noticeably in a number of industries, including retail, logistics and manufacturing.

That could be a harbinger of an imminent slowdown from the average half a million or so jobs gained each month since the start of 2021 to something more like the 178,000 per month seen in the two years before the pandemic.

"What we have seen is an acceleration to the downside over the past couple weeks," said Dave Gilbertson, vice president at UKG.

Moody's Analytics economist Sophia Koropeckyj projected monthly job growth would fall to about 200,000 by the end of this year.

FEWER BODIES

A slight drop in the labor force participation rate last month, to 62.2% from 62.4% in March, along with a decline of nearly 400,000 in the number of people either employed or looking for work, was a step backwards.

After steady improvement in recent months, the drop left the economy's participation rate still 1.2 percentage points below where it was before the pandemic.

Nick Bunker, economic research director for Indeed Hiring Lab, said that data should be viewed in the context of a recent surge in labor supply that has included what he called a "silver lining" in the rising employment rate for those aged 55-64, and gains for younger "prime-age" workers that may see their participation fully recovered over the summer.

But it does add a note of caution about what's ahead. Fewer bodies in the job market could mean more pressure on wages rather than less. The current unemployment rate of 3.6% is historically low for the U.S. economy, and the Fed has struggled in the past to curb inflation without slowing the economy so much that joblessness rises.

Graphic-

Jefferies economist Aneta Markowska believes the job market at this point is continuing to strengthen and projects the unemployment rate will fall to 3% by the end of December, wage growth will accelerate to 6%, and inflation will remain too high for the Fed's liking.

"Underneath the noise, the labor market is still hot and likely to get even hotter," she wrote in an analysis of Friday's jobs report.