Friday’s monthly US jobs report lands at a time when markets are trying to cope with the Middle East war and elevated energy prices. That has sparked inflation fears and a ramp up in Treasury yields, but the Fed’s dual mandate of price stability and also maximum employment means labour markets will grab the attention as cracks have continued to appear. With downward revisions to previous months, it turns out that over the past year the number of jobs added to the US economy has been almost negligible at just 156,000, versus just over 1 million jobs added in the year prior. (Note also that the data is released on Good Friday, when US markets are closed.)
The biggest wildcard of all is when the war and the accompanying commodities shock will impact upon hiring activity. The only real recent comparison in terms of a sudden large war-driven spike in oil prices of this size was in 1990–91. Payrolls fell almost immediately and like today, had been weakening for some time. We note this conflict started at the end of February which was between nonfarm reference periods this time and intensified as the month wore on. That means there could be a more negative impact upon hiring sentiment in the next report.
Consensus expectations
The headline forecast for non-farm payrolls is for another solid gain in jobs of 65,000. This comes after a topsy-turvy couple of months with a -92,000 prior print and +130,000 headline in January with recent swings partly distorted by bad weather and birth-death adjustments. Part of the rebound is expected to reflect the unwinding of a nurses’ strike in California and Hawaii. The jobless rate is forecast to stay unchanged at 4.4% and wage growth is predicted one-tenth lower at 0.3% m/m, and 3.7% y/y.
The labour market has effectively flatlined for the past twelve months, with all other sectors outside of government, leisure and hospitality, and private education and healthcare services losing workers over the past 12 months. Those three sectors have accounted for over 90% of all jobs created over the past few years. Notably, these are not high growth areas of the economy, as the jobs are often low paid, less secure and temporary.
Employment indicators and other factors
Economists say that revisions to February nonfarm payrolls could be quite negative. Nonfarm is stuck in a pattern of serial overestimation which could be particularly acute this time since the sampling rate was among the worst on record. Regarding seasonality, March is typically a fairly strong month for hiring. Otherwise, the weather could have a mild positive impact as temperatures were unusually warm across much of the US in March so could help sectors like construction and leisure. This would be offset by difficulty in posting another positive weather effect this time after the 50k payrolls addition in February.
We get other job market indicators this week, including JOLTS job vacancy figures, ADP and weekly initial jobless claims figures. Job postings are largely moving sideways while private payrolls reported a substantial uptick in job creation by small businesses in February. The high frequency claims numbers point to resilience and a ‘low fire, low hire’ environment.
Recent Fedspeak on jobs and mandate
The Fed’s March statement stated the labour market was softening rather than deteriorating sharply, with job gains remaining low, labour demand softer and unemployment little changed in recent months. Chair Powell has said January’s strong payrolls and February’s weak print should be viewed together, adding that the Committee is concerned about very low job creation, but that effectively zero net private job growth may now be close to what the economy needs.
More recently, other officials like Waller have said labour force growth may now be close to zero, implying a lower breakeven level of job growth. On the outlook, rate setters’ views are split between stabilisation and further softening, as Barr said the labour market seems to be stabilising, but Miran, the arch dove, said the job market has been in an extended streak of weakening.
Money market pricing & reaction
Fed funds futures have shifted sharply in response to developments in the Middle East. Pre-conflict, roughly two quarter point rate cuts were forecast. Now there is virtually nothing expected, with a few bps of hikes forecast last week.
A weak headline, rise in unemployment alongside softer wage growth would be a clearer sign that the jobs market is losing more momentum. On the other hand, if payrolls come in firm and wages stay hot, the Fed will have more reason to stay patient, especially with oil prices still complicating the inflation outlook.