Research Recap | March Jobs Report Underscores Labor Market Tightness

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PHOEBE WHITE: Welcome to Research Recap on JP Morgan's Making Sense podcast channel. I'm Phoebe White, head of US Inflation Strategy at JP Morgan. And today I'm joined by Mike Feroli, our Chief US economist, to discuss takeaways from the March US employment report, as well as the path ahead for the economy and the Fed. Mike, thanks for joining us.

MIKE FEROLI: Thanks for having me.  

PHOEBE WHITE: So Mike, another stronger than expected payrolls gain, 303,000 in March. It seems like the message was maybe more uniformly positive this time. What are your high level takeaways?

Mike Feroli: Yeah, I think that's the main thing, right? We've had a couple of these reports with really strong headline numbers, but then some goofiness in either the revisions or details of the household survey. This time, however, everything looked pretty good. We had pretty negligible revisions. You had a tick up in the work week. You had the unemployment rate edge down, participation rate up. Household measure of employment up. So everything looked pretty good all around. There weren't as many caveats to this report.

PHOEBE WHITE: And what about the composition of that 303,000 number? I mean, it seems like both private and government had strong gains. Anything you're seeing in the composition?

MIKE FEROLI: Yeah, so it's pretty similar to what we've been seeing for much of last year and early this year, which is really strong government. I think it was 71,000 or 72,000, almost all of that at the state and local level, really strong healthcare again over 70,000. But decent breadth overall. I think the diffusion index was something like 59%. So it's not being driven by one or two sectors. Those two that I mentioned, gov and healthcare, really have been the outperformers. But also seeing strength in construction, which is pretty notable too.

PHOEBE WHITE: OK, and I want to also just touch on-- you mentioned this time we saw strength both in household and establishment. Do you want to maybe touch on that divergence we had been seeing? Should we just dismiss the weakness that we'd had in recent months on the household side? Or what are your takeaways there?

MIKE FEROLI: Yeah, so the prior three months, the household measure of employment was down by about 1.5 million. Now, it's always more volatile. But the direction was definitely moving in the wrong way. I don't think with today's number you've completely closed that gap. So it does still send a little bit of a conflicting message there. But I think the bigger takeaway is in the household survey, we tend to think that the ratios are more informative. So the unemployment rate, the employment to population ratio, because with those ratios, the estimates of the population basically cancel out. And that's particularly relevant in this period when immigration may be distorting our understanding of the overall population. But the ratios should still be informative. And what those ratios are telling you is that the employment ratio, employment to population moved up two ticks in the latest reading. And now you're only a tick off the high for the cycle. Whereas, previously you were off three ticks. So there is, I think, good news there.

PHOEBE WHITE: OK, so a lot of good news in this report. One question we get asked a lot is, are we seeing weakness anywhere? And I guess even beyond this report, we had the ISM numbers this week. The employment index is there still below 50. Is there anything you're looking at that suggests labor demand is softening?

MIKE FEROLI: So I guess what I would say is on a trend basis, if we kind of smooth through a lot of the month-to-month volatility, labor demand does look to be softening in broad measures, like overall hours worked, which combine employment and the average work week. In the first quarter, that expanded at a 1% annual rate, which isn't bad. It's an expansionary number. But it isn't particularly booming. And it's definitely off of what we were seeing on average last year or the year before that. So I do think the trend is still toward a very controlled moderation. But as you mentioned, a lot of the surveys are and have been sending a more cautionary message. It's still probably the case that on net the household survey sending a little bit more cautionary message. So we do think labor demand is cooling. But it's clearly, as we saw this morning, it's doing so in a manner that's not worrisome.

PHOEBE WHITE: So what's the takeaway for growth momentum? And how are you thinking about 1Q GDP growth tracking?

MIKE FEROLI: So we're still probably tracking around 2%, 2.25%. Today's number didn't really change that. We won't get much news next week on that matter. But we still see, as I said, some modest slowing into the second quarter. But again, big picture I don't think today's number really changed that.

PHOEBE WHITE: OK, so let's turn over to the inflation side of things and how you're viewing labor market tightness, seeing the unemployment rate tick back down again, 3.8. Labor market still looks pretty tight. Do you think we're still seeing this progress towards more balance in labor markets?

MIKE FEROLI: Well, as I mentioned, the participation rate did move up two ticks, which is more good news on the supply side. And I would say that the one thing that came in pretty close to expectations today was the gain in average hourly earnings 3/10. And that took the year ago measure down to 4.1%. So you are still continuing to see that come lower. You're seeing it even more strikingly in the production and nonsupervisory workers. So 4%, 4.1% still might be a little too high for comfort from an inflation perspective. I mean, if we can put up the kind of productivity numbers we did last year, we can do 4% fine. So I do think the labor market is still tight. I think you'll see that in vacancy unemployment ratios. But it is still moving in the right direction. And again, I think you saw that in that average hourly earnings number.

PHOEBE WHITE: Yeah, so let's just touch more on, I guess, supply side dynamics. Do you think it's possible we continue to get the productivity growth we saw last year? If that comes off, it seems like then we really need to get wage growth lower. How do you think about that?

MIKE FEROLI: I mean, we were probably punching a little bit above our weight last year. And I think what today's number underscores is that we're probably looking at a first quarter where productivity is coming back down to on an annualized growth rate basis 1%, which is not as good as last year. It's not bad. And I would expect that's sort of where we're thinking the trend settles in here, something like 1.5. Whereas, we were doing more like closer to 2.5 last year. But forecasting productivity and the turns in productivity trends is particularly tricky. I know a lot of people right now are getting jazzed up about AI and what that could mean for productivity. I think it might be a little too soon. But we'll see.

PHOEBE WHITE: We'll see. And then the other big story on the supply side is immigration. I know you've done some work on that. Powell has mentioned recently he views immigration as one of the reasons we were able to get inflation down last year. Your own work seems to suggest that the implications of immigration on inflation are maybe more ambiguous. How are you thinking about that?

MIKE FEROLI: Well, actually, Powell in his most recent congressional testimony pointed to some of this ambiguity when he said it adds to labor supply, which is disinflationary. But it adds to consumer demand, which is inflationary. Which of those two factors dominates I think is hard to say. There are arguments on each side. We're not seeing it screaming at us in the data, let's say. We talked about the wage numbers. Right now in the Atlanta Fed wage tracker, high skill and low skill jobs are running about exactly equal. So maybe it's not a complete wash. But I think it's probably close to a wash in my opinion.

PHOEBE WHITE: OK, but for labor markets, would you say it's helping to bring things into better balance? Is that part of the story?

MIKE FEROLI: I think for labor markets the biggest implication is probably what it means for the breakeven rate of job growth that's needed just to absorb new entrants into the labor market. We may have thought previously roughly 100,000 per month. Now it may be closer to 200,000 per month.

And if so, that may better explain why over the past year, unemployment rates have been going kind of sideways, even with job growth averaging 250,000-plus per month.

PHOEBE WHITE: So I want to turn to the Fed. But before we talk about the next Fed meeting, we do have CPI next week. Do you want to just touch on what you're expecting from CPI?

MIKE FEROLI: Yeah, we're looking for 3/10 on both the headline and the core, which I believe on a year ago basis would cause the headline to go up, the core to edge down. Within there, looking for some continued softness in things like used vehicle prices. I think we may get a little bit of progress on rent. But that's probably a slower moving story.

PHOEBE WHITE: Right. So even if we got that number, potentially some progress versus January and February. So if we get your forecast, what do you think the message will be from the Fed at the next meeting?

MIKE FEROLI: Well, I think it's pretty clear that they're not going to do anything at the May meeting. We were previously prior to this morning looking for a first ease in June. Now we think perhaps a little more likely July, even though Chair Powell has said they can cut with good growth as long as you get softer inflation data. I mean, that's just what a Taylor rule will tell you. I do still think there probably will be a little reluctance to ease if you don't see any signs that the economy is cooling. So I think we may need to wait a little longer to see that.

PHOEBE WHITE: So one comment we got from Powell recently that I think surprised a lot of people was at the last press conference he was specifically asked how he was thinking about financial conditions. And he said, "we do think that financial conditions are weighing on economic activity." So how are you thinking about that? You wrote a piece about r-star this week. Do you think the Fed will be reassessing how tight policy is right now, just given how strong growth has been?

MIKE FEROLI: I guess the first thing I'd say is maybe the Fed doesn't assess financial conditions. Individual members on the FOMC do. And there already have been a few who have taken a view somewhat different from Powell and who are a little more concerned that conditions aren't tightening or that easing soon could exacerbate any easing in financial conditions. So I think this is something that's continually being reassessed. But it's interesting that Powell when asked about financial conditions, he quickly turned it over to labor markets and business labor demand. And so this jobs report may be incremental in how they think about how tight financial conditions are.

PHOEBE WHITE: Right. It does seem like markets are starting to rethink how quickly rate cuts can start. We're priced for just over 50% chance of a cut in June, still between two to three cuts for the year. And markets are pricing a bit over 150 basis points of easing over the next two years. So our own thought is long-term rates still look a bit too high here, even if we aren't going to price significantly more easing in the near term. And we're still looking for 10-year yields to drift a bit lower towards 4% by the end of the year. So Mike, thank you so much for joining us. And thanks to our listeners for tuning in.

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