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.
This Week's State Of The Economy - What Is Ahead? - 18 December 2020
Wells Fargo Economics & Financial Report / Dec 21, 2020
This week marked the first U.S. COVID vaccinations and the imminent rollout of a second vaccine.
This Week's State Of The Economy - What Is Ahead? - 02 December 2022
Wells Fargo Economics & Financial Report / Dec 08, 2022
Total payrolls rose by 263K in November, with the unemployment rate holding steady at 3.7% and average hourly earning rising by 0.6%.
This Week's State Of The Economy - What Is Ahead? - 30 July 2021
Wells Fargo Economics & Financial Report / Aug 11, 2021
Despite a few misses on the headline numbers, economic data this week highlighted a theme of demand continuing to outstrip supply and ongoing slack in the labor market.
This Week's State Of The Economy - What Is Ahead? - 03 January 2020
Wells Fargo Economics & Financial Report / Jan 04, 2020
Markets were also pressured from the latest ISM manufacturing report, which signaled further deterioration in the sector with the index falling to its lowest level since 2009.
This Week's State Of The Economy - What Is Ahead? - 20 December 2019
Wells Fargo Economics & Financial Report / Dec 21, 2019
President Trump became the third president in U.S. history to be impeached by the House, but removal by the Senate is highly unlikely. The House also passed the USMCA, which should be signed into law in early 2020.
September 2020 Economy At A Glance
Wells Fargo Economics & Financial Report / Sep 19, 2020
A March survey by the Federal Reserve Bank of Dallas found most exploration firms need West Texas Inter-mediate (WTI) at $49 per barrel or higher to profitably drill a well.
This Week's State Of The Economy - What Is Ahead? - 31 March 2023
Wells Fargo Economics & Financial Report / Apr 08, 2023
This week brought glimpses of market stabilization after weeks of turmoil. Although consumers seem unfazed by the uproar, tighter credit conditions coming down the pipeline will likely weigh on growth.
This Week's State Of The Economy - What Is Ahead? - 26August 2022
Wells Fargo Economics & Financial Report / Aug 29, 2022
I can understand how the opportunity to participate in lots of scintillating economic policy discussions could make fishing look exciting in comparison.
This Week's State Of The Economy - What Is Ahead? - 04 September 2020
Wells Fargo Economics & Financial Report / Aug 29, 2020
Employers added jobs for the fourth consecutive month in August, bringing the total number of jobs recovered from the virus-related low to 10.5 million.
This Week's State Of The Economy - What Is Ahead? - 28 February 2020
Wells Fargo Economics & Financial Report / Feb 29, 2020
The COVID-19 coronavirus hammered financial markets this week and rapidly raised the perceived likelihood and magnitude of additional Fed accommodation.
