The U.S. labor market cooled in April, but continues to resist the impact of high inflation and rising interest rates, with the unemployment rate dipping to 3.4%, a 50-year low. The reasons behind the labor market’s astounding recovery from the pandemic are still unclear, but the latest data may give the Federal Reserve good reason to believe its rate-hiking campaign isn’t doing as much damage as once feared, according to Jason Furman, one of the Obama administration’s top economic advisors.
“We’re now well into the era of the mystery of the extra workers,” Furman, who is currently an economics professor at Harvard University, tweeted Friday about the unprecedented rebound, adding that the recovery is exceeding pre-pandemic forecasts, “which is especially amazing given that the population is smaller than they expected due to premature deaths and missing immigrants.”
The U.S. added 253,000 jobs last month, according to the latest jobs report released Friday, higher than the 180,000 gain economists had projected, according to a Wall Street Journal poll. The labor market has recovered at historic speeds from the blow received during the pandemic, when unemployment peaked at 14.7% in April 2020.
The fast recovery might be best represented in the employment rate for prime-age workers, the percent of adults aged 25 to 54 who are employed. It took only three years for that rate to exceed pre-pandemic numbers, in contrast to the 2008 recession’s fallout, when it required over a decade to normalize.
Average hourly earnings also climbed higher than expected, to 4.4% over the 12 months ending in April, in a good sign for workers but bad news for the Fed, as Chair Jerome Powell has often said over the past year that rising worker wages are a key cause of persistent inflation. But among the three messages Furman saw in the latest labor market data, he took comfort in the knowledge that even if the central bank does decide to push forward with more interest rate hikes, the strong labor market could be spared.
More hikes, but maybe less damage
Furman’s first lesson from the latest jobs report, and other similarly strong ones in recent months, is that today’s labor market is “not consistent” with the Fed’s inflation reduction goals. The Fed wants unemployment to rise so that inflation declines. But the labor market is cooling from its huge gains earlier this year. The big unknown looking forward, Furman noted in his second takeaway, is how much the labor market will contract as the economy slows.
“Contraction in the pipeline from the credit crunch, question is how much,” he wrote, referring to the economic pressures caused by turmoil in the banking sector that reared its head again last week when First Republic Bank filed for bankruptcy and most of its assets were bought by JPMorgan Chase.
The Fed hiked rates another quarter of a percentage point this week to the highest level in 16 years, while signaling it will likely pause for the short term to see what happens next. But with the labor market still as strong as ever, the Fed might be more likely to move forward with more interest rate hikes because the risk of sparking a big jump in unemployment is smaller, Furman wrote.
“Overall Fed has a bit less reason to worry about rate hikes, I'll bet more coming,” he wrote in his third takeaway from the report, suggesting that more rate hikes in 2023 might not cause a severe recession as many investors feared last year.
Other economists, like the University of Michigan’s Justin Wolfers, agreed with Furman’s assessment that the latest labor data is positive. Other commenters have said that the Fed should not cut interest rates anytime soon in light of the jobs report.
“Here's the first big data point we received since the Fed meeting, and it shows us that the Fed is killing the situation where it's not forced to raise rates more aggressively, but it's not in a situation where it has to cut rates either more aggressively,” Art Sarhan, chief executive of 50 Park Investments, told Reuters Friday.
Economists at Moody’s also expressed a positive view of labor market dynamics moving forward in a note Friday. “The imbalance between demand for and supply of labor is beginning to ease across G20 advanced economies” including the U.S., analysts wrote. They added that the labor market will likely loosen and stabilize later this year as the economy slows and, especially in the U.S., immigration flows return to pre-pandemic levels, “easing wage pressures and the risk of more entrenched inflationary dynamics.”
