The U.S. economy added 431k jobs in March, coming in slightly below the consensus forecast of 490k, but a solid reading nonetheless. As has been the case in recent months, upward revisions for the prior two months were meaningful, adding an additional 95k jobs!
Employment gains were widespread, with leisure and hospitality (+112K) seeing the biggest gains – though hiring still remains 8.7% below its (February 2020) pre-pandemic level. Professional & business services (+102k), education & health care (+53k), and retail trade (+49k) also recorded solid gains in March. Goods producing industries (+60k) also saw decent hiring last month, with gains concentrated in manufacturing (+38k) and construction (+19k). Only transportation & warehousing (-500) and utilities (1.2k) recorded declines in March.
The unemployment rate edged lower by 0.2 percentage points (pp), falling to 3.6%. The decline was driven by civilian employment (+736k) outstripping continued growth in the labor force (+418k). The participation rate ticked higher by 0.1pp to 62.4%.
Average hourly earnings rose 0.4% month-on-month (m/m) – and accelerated to 5.6% year-on-year from February’s reading of 5.1%.
Key Implications
Another strong month for US job growth! Through the first quarter of the year, the US economy has added 1.7M jobs, bringing the payroll tally within 1% (or 1.6M jobs) of its pre-pandemic level. At the current pace of hiring, the gap could be completely closed by mid-year.
However, some caution is warranted over the very near-term. According to the CDC, the BA.2 subvariant – the most contagious strain of COVID to date – is now the dominant strain within the US. While case counts still remain low, there is some risk of a new wave of infections, which could slow the pace of hiring (particularly in the leisure and hospitality sector) over the coming months.
The lack of labor supply remains a key challenge for the recovery ahead. Indeed, we saw a further improvement on this front in March, with the participation rate edging modestly higher – though it still remains a full percentage point below its pre-pandemic level. The demand-supply mismatch continues to put upward pressure on wages, which should gradually draw increasingly more individuals back into the labor force. Given the increased cost pressures faced by consumers, further gains in wage growth alongside still elevated levels of excess savings should provide households a sufficient buffer to absorb higher food and energy costs.
Bond yields have moved noticeably higher in recent weeks, as the FOMC has become increasingly more hawkish on the path of future interest rate hikes. The abrupt change in tone has led to a significant flattening in the yield curve, with the 10Y-2Y spread having completely collapsed following this morning’s release. While today’s employment report provides further support that the US economy can certainly withstand higher interest rates, the near inversion of the 10Y-2Y spread shows that financial markets have become increasingly worried about the potential speed of adjustment. We know the FOMC closely monitors movements in the yield curve, so it will be interesting to see if they soften the hawkish tone in the weeks ahead. At present, markets are full priced for another rate hike at the Fed’s next meeting on May 4th, with a 70% probability of a 50bps move.
