Capital markets perspective: Labor market resilience

Capital markets perspective: Labor market resilience


On Friday, the Bureau of Labor Statistics reported that the US created more than 300,000 new jobs last month, significantly more than expected and a healthy acceleration from February’s pace.1 Even more impressive, the unemployment rate remained below 4% for a 26th consecutive month in March. The last time the US economy had a similar winning streak was a 27-month period spanning 1967-1970.

The unemployment rate was also consistently  below 4% for more than a year prior to the arrival of COVID, making it fair to wonder ‘what might have been’ if we hadn’t encountered economic disruption from the pandemic. It also raises the possibility that what the economy is currently enjoying may be less cyclical, which could change the lens through which Friday’s payroll data is viewed.

It’s also worth noting that there were still a few less-than-ideal details associated with last week’s labor market data: overtime hours edged down by 0.1 hour to 2.9 hours in March, and still-lower participation rates by Americans aged 55 over and those with at least a bachelor’s degree. In both cases, labor force participation for those relatively high-earning sub-sets of American labor are still about a percent and a half below pre-pandemic levels.2

Price pressures are indeed picking up – something hinted at by recent inflation data like last month’s Consumer Price Index (CPI) and Producer Price Index (PPI), and reconfirmed last week by a pair of purchasing managers’ indices from Standard & Poor’s.3,4 Prices received by manufacturers reached an 11-month high last month, echoed by a sharp increase in prices (both paid- and received) by service providers.

Following ADP’s March Payroll Insights report, the firm’s Chief Economist, Nela Richardson, reflected that while inflation has been cooling,  “[ADP’s] data shows pay is heating up for both goods and services.”Indeed, annual pay for those willing to leave their current employer suddenly lurched back up to 10% after declining steadily for a year and a half. Re-accelerating wage growth is one big reason that spontaneous bouts of inflation might suddenly get new life.

Speaking of which, comments from various Fed officials last week ranged from the more dovish (Cleveland Fed President and voting member of the FOMC, Loretta Mester, is reportedly “getting close to having the confidence to begin cutting rates”) to the business-as-usual. Chair Jerome Powell reiterated last week that he believes we “still have time to wait and see” before embarking on rate-cutting.

Yet the official who seemed to capture the market’s attention most closely was Minneapolis Fed President Neel Kashkari, who told interviewers from Pension & Investments magazine that although he once believed the Fed would be able to cut rates at least twice this year, he may not see any reason to cut rates at all in 2024 if inflation keeps moving “sideways.” The net result of all this was a zeroing out of rate bets for a cut in May.

Some suspect that the labor market’s strength is slightly over-hyped. As evidence, consider that layoff announcements rose 7% month-over-month in March to more than 90,000 and continued to broaden out beyond just tech. Meanwhile, even the above-mentioned 10% boost in wages for job-quitters called out by ADP’s survey wasn’t quite enough to entice workers to leave their jobs in a wholesale fashion: the quits rate – often viewed as a strong indicator of worker confidence – remained stuck at 2.2% for a fifth consecutive month in Friday’s report. Incidentally, that’s slightly below where it was before the pandemic hit and not far off from the level in place immediately before the Great Recession of 2008-09, suggesting that workers are a little more worried about their jobs than a sub-4% unemployment rate might otherwise imply.

What to watch this week

As inflation has shown troubling signs of stubbornness, Wednesday’s CPI and Thursday’s PPI data remain crucial to the market narrative. Until we see more progress toward the Fed’s 2% target, inflation data will remain top-of-mind.

Much of the other stuff on this week’s calendar is also inflation-relevant, including import/export prices on Friday and the Bureau of Labor Statistics’ hourly earnings data, released in conjunction with Wednesday’s CPI data. If wage growth appears inconsistent, markets will likely continue to fret about a reacceleration of inflation, even if headline CPI and PPI are themselves tame.

On the other hand, if real earnings stall or turn decidedly negative, it could damage consumer sentiment as Americans see their paychecks stretched farther and farther. We’ll get a read on consumer sentiment when the University of Michigan (UofM) releases its mid-month update on Friday. In addition to consumer attitudes in general, the UofM also publishes consumer views on both short- and longer-term inflation. Both of those figures have been hovering just below 3%, and any break to the upside would be bad news for inflation-watchers as well.

Meanwhile, one of the more significant reads of business confidence – the National Federation of Independent Business’ (NFIB) small business confidence index – will be released on Tuesday. Small businesses have been feeling far less upbeat than larger ones, which is problematic considering how significant small enterprises are to US economic growth. Like the UofM’s consumer survey, the NFIB’s survey is full of other data including expectations about wages, selling prices, capital expenditures, and more.

Inflation is most relevant to markets in the here-and-now for what it implies about Fed policy. For clearer insight into that, tune in when the Fed releases the official note-taking from its March meeting on Wednesday. There was very little controversy surrounding the Fed’s decision to keep rates on hold at that meeting, but context is everything. That should make Wednesdays release of the Fed minutes interesting.

Finally, first quarter earnings season gets its unofficial start on Friday when big banks like Citigroup, JPMorgan, and Wells Fargo release results for the March quarter. As always, banks provide excellent read-through into the macroeconomic environment given that they sit at the crossroads between the economy and the financial one. At this stage, it has become critical to assess bank lending standards – which have been extremely tight for the better part of a year – as well as what they’re seeing on the delinquency side. For those banks with significant consumer exposure, also look for insight into consumer balances and spending activity to triangulate demand growth.

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1 Bureau of Labor Statistics, "Employment Situation Summary," April 5, 2024. 

2 Bureau of Labor Statistics, "Employment Situation Summary," April 5, 2024 and Empower Investments calculations

3 S&P Global US Manufacturing PMI®, "Factory output growth hits 22-month high in March," April 1, 2024.

4 S&P Global US Services PMI®, "Growth of activity sustained at end of first quarter," April 3, 2024.

5 ADP, "ADP® Pay Insights," April, 2024.

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Tom Nun, CFA


Tom Nun, CFA, Portfolio Strategist at Empower, works alongside teams overseeing portfolio construction, advice solutions, portfolio management, and investment products and consulting.

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