The April jobs report came in below economists’ expectations, giving them hope that a softer labor market could ease pressure on wage inflation.
The total number of jobs was lower than expected, with the U.S. adding 175,000, the smallest monthly gain in six months. Unemployment rose from 3.8% in March to 3.9% in April, but remained lower 4% For 27th month in a row, evidence of a historically strong labor market. Friday’s report said wages rose 0.2% in April from the previous month, slightly below the 0.3% forecast.
Vacancies data and wage growth are used as indicators of inflation because they can provide an indication of consumers’ willingness and ability to spend money. If consumers are employed and can easily find a new job, they can spend money around the world. This in turn increases demand, meaning businesses can charge higher prices for their products. Moreover, when wages continue to rise, businesses typically have to pass on some or all of the increased costs to consumers in the form of higher prices. When wages and employment levels decline, it puts less pressure on prices, which is why even the slight decline in this jobs report caught the attention of economists.
But according to Jason Pride, head of investment strategy and research at Glenmede, it is too early to draw definitive conclusions.
“One month is not a trend, but today’s jobs report likely gives the Fed some much-needed confidence that higher rates can start doing their job,” he said in a note.
For there to be clear signs that inflation is coming under control, wage growth must remain below 0.3% for at least three months in a row, Pride said. Luck in an email. “It’s kind of like a game of tic-tac-toe: Nobody wins if all you can string together is one or two in a row,” he said.
Meanwhile, consumer inflation accelerated to 3.5% The annual pace in March is still above the Fed’s target of 2%, which it considers a stable level of price growth.
On Wall Street, investors have had to take every major economic data release over the past year with a grain of salt. At first there were fears recessions, but those meltedto replace hopes for a soft landing (although even this was discussed). At the beginning of the year, when it seemed that the Fed would begin year of rate cutsinflation data will not move lower, delay everyone’s hopes. These fast few months have not gone unnoticed.
“A rollercoaster of investor emotions prevails as we enter a seasonally weak period,” John Lynch, chief investment officer of Comercia Wealth Management, said in a research note.
In addition to the stunning data, today’s report showed only a slight increase in the number of unemployed people. Economist Paul Krugman pointed to X that if the numbers had been expanded to two decimal places, the unemployment rate would have risen from 3.83% in March to 3.87% in April—an increase of only 4 basis points. However, it has drawn some cautious attention from Wall Street on the grounds that it signals an early start weakening in the job market.
So far, this fight against inflation has been unusual because the cooling trend has not matched the usual surge in unemployment. This supports hopes for a so-called soft landing, in which inflation would fall without pushing the US economy into a recession, which invariably consists of layoffs and a subsequent rise in unemployment. The Fed has been trying to steer the economy toward a soft landing since inflation peaked at 9% in the summer of 2022. Initial progress toward a soft landing surprised many observers, but the last mile of inflation is now proving difficult to overcome. tamed.
Inflation has so far remained high longer than the Fed and economists had hoped. This ultimately influenced the forecast for rate cuts this year. After some expectations that the first such cut would occur in June, the consensus now appears to be that it will occur in the fall. Slightly higher unemployment figures indicated the economy was feeling the pressure of a tightening interest rate cycle. But they haven’t proven anything yet.
“A small, gradual easing in rates would not necessarily be an unwelcome development, especially in a tight employment environment that has been a key tailwind of ongoing inflation, but further progress will need to be seen before investors can expect an imminent rate cut from the Fed,” Pride said. .
The labor market may already have been weaker than reflected in the data, according to William Blair equity researcher Richard de Chazal. He cited some discrepancies between different labor market surveys, which may not have adequately taken into account the impact of immigration in recent months. Now that they were resolved, the data pointed to a cooler labor market than previously thought. “Today’s report further confirms that labor market strength is indeed beginning to weaken more significantly,” de Chazal said in a research note.
Why this data is slowing may be as important as whether it continues. “Employment data has always slowed, but potentially for two very different reasons,” de Chazal told Fortune via email. “Either we’re running out of jobs – immigration has helped a lot here – and that’s a good reason. Or companies are actually slowing down hiring and perhaps moving toward layoffs. It’s less good.”
Economists believe immigration almost certainly helped save the labor market is afloat in recent months. The post-pandemic surge of new workers entering the country has likely helped employers. play roles that they would not be able to do otherwise.
But if job numbers fall because companies can’t afford to hire workers, that becomes more problematic and could herald the layoffs that typically herald a recession. To assess whether that’s true, “the burden of proof is on corporate earnings beating forecasts,” Lynch said.
Because “as profitability comes under increasing pressure, the desire to retain workers disappears,” de Chazal added by email.