US labour market monitor: Slack continues to build

Recent batch of labour market data has primarily yielded cooling signals. Nonfarm payrolls (NFP) came in lower than expected at 175k (cons: 243k), while February and March figures were revised down by a combined 22k. Similarly to the pattern seen in recent months, job gains were primarily attributable to the services sector – especially in education and health care. The sharpest slowdown was seen in public sector jobs growth.

As such, the ADP private sector jobs report was actually stronger than expected at 192k. While jobs growth continues at a healthy pace, it has also been complemented with further increase in labour supply. The participation rate for prime-age labour force (25-54y) and 20-24y rose further in April, which pushed the unemployment rate slightly higher to 3.9%. In other words, while labour markets are growing, the overall conditions are still getting gradually looser.

March JOLTs job openings fell short of market’s expectations, printing at 8.49m. Hence, the ratio of unfilled vacancies per unemployed edged down to 1.32, the lowest level since the pandemic-shock. In tandem with the hiring rate edging down to 3.5%, this clearly indicates that labour markets are becoming more balanced. NFIB’s small business survey confirmed that firms’ hiring ambitions have continued to decline, but at the same time, we see no signs of clear increases in layoffs. In the JOLTs data, the number of total separations decreased by 339k and involuntary layoffs by 155k.

Although average weekly hours worked fell to 34.3 in March (prior: 34.4), average hourly earnings growth slowed down to 0.2% m/m and 3.9% y/y. This marks the first yearly change below 4% since June. Alternative wage indicators – for instance the Atlanta Fed and the Indeed Hiring Lab, also support the notion of slowing momentum.

In contrast to the more benign wage development, Q1 non-farm unit labour costs surprised to the upside at 4.7% q/q AR SA (cons: 3.3%). The hotter-than-expected print stems from productivity growth slowing sharply. Faster productivity growth could allow firms to pay higher wages without much upside pressure on costs, but recent Fed speakers have made it clear that the central bank does not assume that 2023’s unusually strong development will continue. If productivity growth stabilizes close to pre-pandemic average levels, annual wage growth around 3% would be consistent with 2% inflation.

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