The US unemployment rate likely dropped to its pre-pandemic low of 3.5% in April, while job growth moderated to a still brisk pace amid widespread worker shortages, underscoring the challenge the Federal Reserve faces to curb high inflation.
The Labour Department’s closely watched employment report on Friday is also expected to show wages rose solidly last month and highlight the economy’s strong fundamentals despite a drop in gross domestic product in the first quarter.
“Consumers have money to burn and businesses are trying to hire people, but labour shortages are, if anything, getting worse,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. “I think we are seeing the beginning of a wage price spiral, and it is going to be a tough nut to crack, even for the central bank.”
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Nonfarm payrolls likely increased by 391,000 jobs last month after rising 431,000 in March, according to a Reuters survey of economists.
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That would mark a slowdown from the first-quarter average gain of 562,000 jobs per month and snap an 11-month streak of payroll gains in excess of 400,000. Estimates ranged from as low as 188,000 jobs added to as high as 517,000.
The unemployment rate is forecast to drop to 3.5%, which would be the lowest level since February 2020. The jobless rate was at 3.6% in March and has declined by four-tenths of a percentage point this year.
There were a record 11.5 million job openings on the last day of March, which widened the jobs-workers gap to a record 3.4% of the labour force from 3.1% in February.
The Federal Reserve on Wednesday raised its policy interest rate by half a percentage point, the biggest hike in 22 years, and said the US central bank would begin trimming its bond holdings next month. It started raising rates in March. Fed Chair Jerome Powell told reporters “the labour market is extremely tight, and inflation is much too high.”
There are concerns the Fed could raise rates too high and choke off economic growth. Though GDP contracted in the first quarter under the weight of a record trade deficit, domestic demand was strong, with consumer spending picking up and business investment in equipment accelerating.
Seasonal quirk
Some of the anticipated slowdown in payrolls last month would also reflect a seasonal quirk. April is one of the strongest months for job growth, which is normally anticipated by the seasonal adjustment factor, the model that the government uses to strip out seasonal fluctuations from the data.
Payrolls unadjusted for the seasonal fluctuations have generally topped one million in April, with the exception of 2020 when the Covid-19 pandemic was raging.
“The seasonal adjustment factor anticipates strong hiring in April and has, on average, reduced seasonally adjusted employment by 820,000,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Therefore, we’re assuming another 800,000 drag from the seasonal adjustment factor in April.”
Growing worker shortages were evident this week in other labour market reports, which all pointed to slower employment gains in April. With the gap between labour demand and supply widening, wages likely maintained their strong growth pace.
Average hourly earnings are forecast to rise 0.4%, matching March’s gain. That would lower the year-on-year increase in wages to a still-robust 5.5% from 5.6% in March. But wage growth could surprise on the upside as the survey period for April’s employment report included the 15th day of the month.
Compensation for American workers logged its largest increase in more than three decades in the first quarter, helping to support domestic demand.
“Following a very strong increase in employment costs in the first quarter, evidence of upward pressures on wages continuing into the second quarter would keep risks tilted towards a more hawkish Fed,” said Veronica Clark, an economist at Citigroup in New York.
Though Powell on Wednesday said a 75-basis-point rate hike was not on the table, some economists believe the Fed could raise its benchmark interest rate above its estimated neutral rate of between 2% and 3%.
Other details of the April employment report likely were strong. The average workweek is expected to have risen to 34.7 hours from 34.6 hours in March. The steady flow of workers back into the labour force also likely continued last month. A total of 722,000 people entered the labour force in February and March.
With annual inflation increasing at its fastest pace in more than 40 years, the rising cost of living is pulling some people who had retired back into the workforce.
