The US unemployment rate added 178,000 jobs in March, which appears to be strong on the surface. However, average monthly earnings over the past two months were only 22,500, and earnings growth has fallen to the lowest level since the crisis reopened. The decrease in the unemployment rate is due to about 400,000 Americans leaving the workforce due to difficulties in finding work. The bigger difference comes from the Middle East: the closure of the Strait of Hormuz has caused tension in the energy market, with high oil prices that could offset 10% to 50% of the effects of Trump’s tax cuts quarter by quarter.
Behind the glowing work record lies an even more unsavory story.
Non-farm payrolls data for March, released by the US Labor Department on April 4, seem to have given some encouragement to the market at the top – but the shadow of war and job losses make this comfort even lighter.
Jobs increased by 178,000 in March, marking the largest increase in nearly 15 months and reversing a revised decline of 133,000 jobs in February. The unemployment rate also fell from February to 4.3%. When the information was released, the market took a momentary breath.
However, the drop in the unemployment rate is not due to an increase in job opportunities. The truth is that nearly 400,000 Americans left their jobs last month. When jobs become hard to find, people stop looking.
Labor economist Guy Berger put it bluntly: “No one is talking about an expanding labor market.”
Statistical analysis reveals the true underlying trends.
Wide fluctuations in one-month data mask the true rhythm of labor market activity.
Averaged over February and March combined, monthly job growth was only about 22,500—closer to the real baseline.
A serious problem lies in the fact that the participation rate of the US workforce fell to 61.9% in March, the lowest in almost five years. Barring pandemic-related setbacks, this number marks the lowest since 1976, when women began entering the workforce in large numbers. Gus Faucher, chief economist at PNC Financial Services, noted that an aging population and recent restrictions on immigration are contributing to a tight labor supply contract.
Other notable facts: annual wage growth for regular (non-executive) workers fell to 3.5%, the lowest level in five years since the crisis reopened. Low wage growth means weakening support for consumers’ purchasing power.
The unfair balance of ‘low hiring, low firing’
The current American labor market shows a very contradictory feature: a lack of hiring power, yet companies are also reluctant to fire workers.
Data shows that last year, the health care industry was almost the only engine of job creation. Outside of health care, other sectors of the economy are losing jobs. Over the past 12 months, the U.S. economy has only added 327,000 jobs, well below the normal annual rate of 1 million to 2 million.
“Hiring is at a low level, but layoffs are also at a low level,” explained Bill Adams, Chief Economist at Fifth Avenue Bank. The four-week total of initial jobless claims fell to 207,000, the lowest number in history. This ‘don’t hire or get fired’ situation has been called by economists the ‘low hiring model, which maintains stability and low stability.
The Hormuz Shock: This Time Is Different
In recent years, the US labor market has weathered steep interest rate hikes, banking crises, and interest rate hikes, bending but not breaking from time to time.
However, according to The Wall Street Journal, this time the war with Iran has led to the closure of the Strait of Hormuz, which affects the global energy supply in a very different way.
Estimates from St. Louis Federal Reserve shows that if the price of oil remains at the current level, the additional consumption of a quarter of a quarter of gasoline by consumers can reduce 10% to 50% of the effects of the Trump tax cuts last year.
The logic is clear: every dollar spent on fuel means one dollar less goes to restaurants, shops and the service sector – sectors that form the backbone of US employment.
Meanwhile, rising bond yields have lifted 30-year mortgage rates from 6% to 6.5%. The much-anticipated boom in real estate and the expected increase in construction employment now appears to be uncertain.
Consumer protection is almost gone.
The energy shock caused by the war between Russia and Ukraine in 2022 was fueled by consumers relying on large sums of money accumulated during the pandemic.
This time, the situation is different.
Nathan Sheets, Citigroup’s Chief Economist, pointed out that consumer savings buffers have been greatly reduced, combined with a slowdown in income growth, significantly reducing the ability of households to absorb price increases. He said, “What would defeat them is a major recession in the job market.”
The papers compared the current job market to an “athlete in high training” – years of horrors have made businesses flexible and adaptable. However, Skanda Amarnath, Employ America’s Executive Director of economic strategy, offered a more cautious explanation, describing the current job market as “soggy in power” – “long-term sluggish, but not yet collapsed.”
Guy Berger put it bluntly: “The years 2022, 2023, 2024, and 2025 have made me realize anew that slow but steady deterioration is impossible.”
The Federal Reserve is in trouble.
The tightening of the labor market has not eased the Federal Reserve’s stance.
Before the war broke out, several Federal Reserve officials were expecting interest rates to resume this year. Now, many officials have indicated that interest rates can remain unchanged indefinitely.
Mary Daly, President of the Federal Reserve Bank of San Francisco, wrote in a blog post on April 4: “Communicating to the public that job growth is inconsistent with full employment is not easy.” He also warned that the ceiling for economic growth has been lowered, which increases the risk of misjudgment from interest rates to be too high or too low.
The main objection facing the Federal Reserve is that it has spent five years explaining to the public that “high interest rates are temporary,” and each new supply scare makes this statement more difficult to maintain. If high interest rates are maintained to suppress inflation, the labor market may come under pressure; if interest rates are cut to protect employment, inflation expectations may spiral out of control.
Daleep Singh, Chief Global Economist at PGIM, outlined two scenarios: if both sides reach a good ceasefire agreement, oil prices could fall between $80 and $100 per barrel; if the conflict worsens, supply disruptions will weigh more heavily on growth than the war itself, making it more difficult for the Federal Reserve to ease the recession by cutting rates.
The outcome depends a lot on how long the fight lasts.
Editor/Lambor
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