Employment Growth Slows as Labor Market Normalizes after Hot Q1

Key Takeaways:

• The Federal Open Market Committee (FOMC) held the federal funds rate at its current target range of 5.25-5.5 percent at its April 30-May 1 meeting. The committee announced that beginning in June, the Fed will slow the pace of decline of its securities holdings by reducing the cap on Treasury securities from $60 billion to $25 billion. The MBS cap of $35 billion was unchanged, though the actual runoff has been closer to $15 billion per month. Both the prepared statement and Chair Powell noted a “lack of further progress” toward the 2-percent inflation objective in the first quarter.
• Nonfarm payroll employment increased by 175,000 in April, a slowdown from the upwardly revised 315,000 jobs added in March. Job gains were strongest in health care, social assistance, and transportation and warehousing. The unemployment rate ticked up one-tenth to 3.9 percent. Wage growth looks to have normalized, with a 0.2 percent gain over the month, bringing the year-over-year comparison to 3.9 percent.
• The Job Openings and Labor Turnover Survey (JOLTS) declined by 325,000 to 8.5 million in March, the lowest level in three years but still above the 2019 average of 7.5 million, according to the Bureau of Labor Statistics (BLS). The quits rate declined one-tenth to 2.1 percent, the lowest level since January 2018, excluding the initial 1pandemic shock. Layoffs and discharges eased to 1.5 million after hitting 1.7 million the month prior.
• Nonfarm business productivity increased at a 0.3 percent annualized rate in Q1 2024, a sharp slowdown from the 3.5 percent annualized growth rate the quarter prior, according to the BLS. Still, compared to a year ago, productivity was up 2.9 percent, the best year-over-year comparison since in three years. Unit labor costs rose at an annualized rate of 4.7 percent but, compared to a year ago, slowed to just a 1.8 percent gain.
• The Employment Cost Index (ECI), a measure of labor compensation, increased 1.2 percent in Q1 2024, an acceleration of three-tenths compared to the prior quarter. Compared to a year ago, the ECI was up 4.2 percent, unchanged from the fourth quarter.
• The Institute for Supply Management (ISM) Manufacturing Index slipped back into contractionary territory with a 1.1-point decline to 49.2 in April. Both the new orders and production indices were down, falling 2.3 points to 49.1 and 3.3 points to 51.3, respectively. The not-seasonally adjusted prices paid index rose 5.1 points to 60.9, its highest level since June 2022, likely reflecting higher oil prices.
• The Conference Board Consumer Confidence Index dropped 6.1 points to 97.0 in April, its lowest level since July 2022. Confidence in the present situation declined 3.9 points to 142.9, while expectations for the future were down 7.6 points to 66.4.
• Light vehicle sales increased 2.8 percent to a seasonally adjusted annualized rate (SAAR) of 16.0 million in April, the best sales pace since December, according to Autodata.
• The FHFA Purchase-Only House Price Index increased a seasonally adjusted 1.2 percent in February, the largest monthly increase since April 2022. Compard to a year ago, home prices were up 7.0 percent, an acceleration of six-tenths compared to January and the fastest annual growth rate since November 2022.

Forecast Impact:

Employment growth was in line with our Q2 expectations. With wages increasing at a rate that would be consistent with 2-percent inflation if sustained, we view this report as a sign that the labor market is normalizing. Job growth was strong enough to keep pace with population growth and to continue to spur consumption without being so strong that it stokes further inflationary pressures. Looking back to Q1, the ECI came in a bit hotter than expected, consistent with other data showing that inflation picked up a bit to begin 2024. This was offset somewhat by robust productivity growth, though, which pushed unit labor costs down to a level that would be consistent with 2-percent inflation. Productivity is difficult to both measure and forecast, but we view the decline in job openings and another tick down in the quits rate to be consistent with easing wage growth during the year. As such, we continue to expect a gradual, albeit slow, return to 2-percent inflation over time, which is supported by the April jobs report.

From a monetary policy perspective, Chair Powell said that a rate hike was “unlikely” and that the current focus of the committee is on how long to leave the policy rate restrictive. Current market pricing still has between 1 and 2 cuts this year, in line with our current forecast. Other indicators this week, including the ISM manufacturing index and consumer confidence, were also consistent with slowing economic growth in line with our forecast.

Nathaniel Drake
Economic and Strategic Research Group
May 3, 2024

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