Last week's March employment report is the last key labor data before the upcoming FOMC meeting on 05/01. And this employment report reaffirms that the labor market remains strong and completely dispels the Fed's fears of labor recession.
From now until the upcoming meeting, the Fed will closely monitor the remaining important data to be released sequentially over the next 3 weeks, including:
CPI and PPI inflation reports: this Wednesday and Thursday
Retail sales: 04/15
And PCE inflation report: 04/26
The above reports are extremely important for the Fed to assess the direction of inflation and the strength of US consumer spending (accounting for 70% of GDP). Especially, ahead of the scenario where US households' excess savings have come to an end.
According to the April event lineup, this weekend's Macro Economics article from Viet Hustler will kick off April with two main analyses:
March employment report (released last week) and its impact on Fed policy stance
What other factors will impact Fed policy in the coming period.
Last week's March employment report and Fed stance
Last week's employment report brings 2 pieces of good news for the Fed:
1. Strong job growth – no signs whatsoever of labor recession.
The March employment report is one of the rare recent reports where the payroll employment survey and household survey indicate the same trend:
The US labor market added quite a lot of jobs last month!
NFP payrolls increase +303,000 (beat estimates: +212,000 | Feb: +270,000).
Employment increase per Household Survey: +498,000 (while last month decreased -184,000 jobs)
Unemployment rate falls from 3.9% to 3.8%
Labor force participation rate rises from 62.5% to 62.7%
Average weekly hours worked increase to 34.4.
All the numbers show that the labor market is not weakening at all amid high interest rates and credit crunch!
2. Wage growth slows: reduces pressure on inflation
A quite welcome point in this employment report is that despite more jobs added in March, wage growth slowed down
=> Indicating that job growth is not solely from increased/tighter labor demand (businesses still not raising wages).
The cause may be increased labor supply (due to increased number of immigrant workers):
… easily meeting businesses' hiring demand without needing to raise wages.
The figure reflecting labor market tightness (job openings / unemployed persons) (orange), fell to 1.36 in Feb 2023.
A sign showing the labor market has become less tight compared to before due to increased labor supply!
However, there are still quite a few unresolved imbalances in the labor market
The following issues have been lingering for many months since the Fed raised interest rates:
Although this month, the two payroll surveys (NFP and Household) do not conflict like previous months, there is still a huge discrepancy in total employment between these two surveys.
And the number of people holding multiple jobs at once (part-time jobs) remains too high:
Labor market added up to +691,000 part-time jobs, but lost -6,000 full-time jobs in March.
FYI: Total full-time jobs lost in 2023 were -1.347 million jobs, even though the number of part-time jobs increased to 1.888 million.
More part-time jobs being hired could also be one of the reasons why average working hours are decreasing.
Public sector (including healthcare system) is also creating too many jobs compared to private sectors
=> putting pressure on public debt due to high public costs + tax pressure on the private sector.
Labor force is still growing below pre-Covid average levels, i.e., more people are leaving the labor force.
One of the reasons keeping the U3 unemployment rate down!
Employment-to-population ratio is also declining sharply => burdening social security costs and public spending.
Finally, compared to the strong overall job growth in the labor market: manufacturing industry is being left behind with very little manufacturing job growth!
Of course, not ruling out the possibility due to the US economy's trend of decreasing manufacturing labor and increasing service labor.
What impact will the March jobs report have on the Fed's interest rate decision in the May meeting?
Overall, the underlying issues in the jobs report also do not have a direct impact on the Fed's interest rate policy compared to the tip of the iceberg full of positives with increasing job numbers and low unemployment rate.
Simply because interest rate decisions are partly based on a balance model with unemployment rate and inflation:
Previously, Viet Hustler analyzed this model: for the Fed to cut -1% interest rates:
Inflation (PCE) must decrease -1%/1.5 ~ -0.66%.
Or unemployment rate must increase +1%.
Or a combination of decreasing inflation and increasing unemployment…
Read more: Basis for the Fed's interest rate decision (end of the article section)
Therefore, this is a jobs report that reassures the Fed to continue holding high interest rates for a longer period!
(simply because it seems the Fed no longer has recession pressure in the labor market)
Even Bowman (Fed member) confidently stated that one more rate hike could still happen if inflation is not contained.
What other factors could make the Fed Pivot early?
1. Weakening consumption shown through retail sales (and later GDP growth)
Although data still shows strong consumption, the pressure from high interest rates and inflation on consumption is quite clear with record-high credit card debt and declining savings rate:
Credit card debt in Feb 2024 has risen sharply again:
Total revolving credit debt (revolving credit) in the US is ~USD 1.3 trillion, up from ~USD 960 billion in 2021.
Amid credit interest rates also reaching record high ~25%.
Meanwhile, the savings rate has dropped sharply to just 3.6%, with households' spending power at a fairly low level.
March retail sales, to be released on 04/15, will be one of the tests of the pressure from inflation and interest rates on consumer spending.
The m/m growth figures for the previous two months were both lower than expected.
And as Viet Hustler warned since the end of 2023, excess Covid-era savings are likely to be depleted by the end of Q1 / early Q2 2024.
This figure dropped sharply by -USD 92 billion from January down to USD 27.3 billion in February!
Anyway, slowing consumer spending will also have a positive impact on cooling inflation and prompting the Fed to cut rates sooner.
2. CPI data (Wed) and PPI (Thu) next week
Even though the Fed asserts that PCE is the inflation measure used in macroeconomic equilibrium models, CPI growth remains the traditional inflation figure widely recognized.
Next week's March official CPI (and producer PPI) inflation data is a key figure for the Fed to assess the trajectory of inflation ahead of the upcoming May FOMC.
Bloomberg predicts CPI will slow from last month, with m/m growth for both headline and core at +0.3% m/m.
3. Interest rate cut actions by other major Western central banks
SNB cut rates in its March meeting
ECB meets next week and is likely to cut rates starting in June
BOE is also beginning to plan rate cuts.
Typically, US interest rate policy influences tend to spill over and impact financial conditions and exchange rates in other regions, more than the reverse.
However, what would happen to the US if a series of major European central banks (ECB, BOE, and SNB) all cut rates while the Fed has not?
The biggest impact would likely be on the forex market as the USD strengthens against other currencies.
In fact, this would have a positive effect on import prices (helping to cool US inflation).
But it would negatively impact exports, causing US GDP to decline – making it harder for the Fed to achieve a soft landing.
Additionally, in the worst case if their domestic currencies depreciate too sharply, Western central banks might want to defend their currencies, possibly by selling USD.
However, Western central banks rarely resort to such intervention measures compared to their Asian counterparts like BOJ or PBOC.
CONCLUSION
In summary, last week's labor report was surprisingly positive, with both surveys (NFP payroll survey and household survey) showing a strong job growth trend in the US.
Nevertheless, lingering painful issues causing post-Covid labor market imbalances persist, such as:
Decline in full-time jobs replaced by part-time jobs
Unsustainable public vs. private sector job balance, creating a tax contribution burden on the private sector.
Labor force growth relative to the total population has declined - while social security burden payments are increasing.
However, even if the Fed recognizes these issues, with the unemployment rate at a low 3.8%, the Fed's equilibrium model will not support rate cuts at the current time.
Data over the next 3 weeks that could influence the Fed's stance include a series of inflation indicators and retail sales. Especially against the backdrop of excess US household savings expected to have ended in March (or early April this year).
With savings running low and the savings rate sharply declining, will inflation and GDP soon fall, pressuring the Fed to cut rates?
Additionally, another factor that could have a minor impact on the Fed's interest rate policy is the rate-cutting trend among other Western central banks, especially the ECB.
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