This Week's State Of The Economy - What Is Ahead? - 07 April 2023

By: Taro Chellaram /Wells Fargo Economics & Financial Report/Apr 10, 2023

This Week's State Of The Economy - What Is Ahead? - 07 April 2023

Labor Market is Strong but Loosenin

This week's data broadly added to evidence that the labor market is loosening. The big release of the week was the nonfarm payrolls report on Friday morning, which showed employers added 236K net new jobs in March. This is still above the pre-pandemic run rate, but marks the lowest pace of job growth since late 2020 and is a marked move lower from the near 350K jobs added on average over the past three months. The unemployment rate ticked lower to 3.5% and labor force participation rose for the fourth straight month. Improved supply has helped soften the trend in earnings growth. Average hourly earnings are up just 3.2% at a three-month annualized rate, which is more consistent with the Fed's 2% inflation target (chart). This is very much what the Fed is looking for in terms of curing the labor market imbalance with more workers returning to the labor force.

Labor weakness was evident in other data as well. The March ISM reports showed a softening in hiring, consistent with layoffs in manufacturing and a slower pace of hiring in services. Job openings fell below 10 million, registering the lowest level since May 2021. The number of openings per unemployed worker also fell to 1.67. This remains above the 1.2 pre-pandemic ratio, but marks a 15-month low and is consistent with a topping out in labor demand—as is the fact that the lowest share of small businesses since May 2020 now plan to add workers in coming months. Finally, past revisions to initial jobless claims, which was one of the key data points stubbornly demonstrating strength, also now show a clear uptrend in recent months. All these data signal the labor market is weakening, albeit from a very strong starting point.

Beyond labor, there are growing signs of weakness elsewhere in the economy. Both ISM reports demonstrated economic slowdown last month. The ISM manufacturing index slid to its lowest level since 2020 and is consistent with a sector that has now been in correction for five straight months. Every sub-component was in contraction (below the breakeven 50) for the first time since 2009. At the same time, the services report called service sector resilience into question. The services index slid sharply to 51.2 from 55.1, but most major components remain consistent with expansion. This was not a great development for the services sector, but it's too soon to call off expansion, particularly in light of a solid gain in private service-providing industries employment in March (+196K).

The good news is that there are signs of slower activity bringing reprieve to prices. The prices paid components of both ISMs declined in March, though as shown in the nearby chart the gap between the two remains large, demonstrating how integral services prices are to returning inflation to the Fed's 2% target. At 59.5, service sector price pressure remains firm, but this is the first time it has slipped below 60 since late 2020. Overall it appears we have reached the point where a broadening group of indicators is suggesting the slowdown is in train and the end of the Fed's tightening cycle is in sight.

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