If the labor market starts to deteriorate, the Fed’s caution may be justified | Private Equity Weekly
Strong job growth in March may prompt the Federal Reserve to take a more cautious stance on potential rate cuts, while there are conflicting signs of labor market strength. After the Labor Department’s non-farm payrolls report on Friday showed strong growth of 303,000 jobs, futures markets are pricing in a slightly higher than 50% chance that the Federal Reserve will begin cutting interest rates in June. Strong job prospects could bring more inflationary pressures, meaning central banks may be less eager to ease policy. The prospect of Fed tightening has been poisonous for stocks in recent days, and stocks posted a solid relief rally on Friday despite strong non-farm payrolls data. Seema Shah, chief global strategist at Principal Asset Management, said: “Another big jobs number has Fed rate cut forecasters nervous.” On the bright side, though, Shah A added, “(Friday’s) report should reassure markets that if the Fed doesn’t cut interest rates in June, it’s because the economy remains strong and earnings should keep rising.” Signs of weakness come as the Fed cuts benchmark short-term borrowing Interest rates remained at their highest level in 23 years, but employment data showed the labor market was tight and the economy remained strong. Still, some investors and economists worry the Fed’s restrictions could last too long. Allianz chief economic adviser Mohamed El-Erian on Friday accused the Fed of relying too much on rolling data points and should instead focus on long-term strategy. “The mistake they might make is that they get too nervous this time,” he told CNBC at a financial conference in Italy. Indeed, there are some signs that the labor market’s strength may not be as strong as the overall The non-farm payrolls data are as strong as they show. First, while employment numbers reflect total employment obtained through broad enterprise surveys, smaller household surveys consistently show fewer people actually working. While the latter data showed employment rose by 498,000 in March, employment has fallen by about 400,000 since November. There is also the composition of employment. Most of the job growth over the past few months has come from just a few industries: health care, government, leisure and hospitality, although construction saw strong growth in March. The gains are then concentrated in part-time jobs rather than full-time jobs. The number of workers working full-time fell by 6,000 in March, 1.35 million fewer than a year earlier. At the same time, the number of part-time workers increased by 691,000 in March, an increase of 1.9 million, or 7%, from the same period last year. Additionally, the number of people reporting permanent unemployment has surged by more than 30% since January 2023, despite a decline in March. Many economists are looking to temporary workers for signs of a weakening job market, but temporary employment also fell again in March, with 181,000 fewer jobs, or 6.2%, than a year earlier. The role of immigration So what makes the headline numbers so high? Economists on Wall Street and at the Federal Reserve are skeptical that rising immigration plays a role in boosting employment and keeping the labor market tight. Citing data from the Congressional Budget Office and other sources, Goldman Sachs estimates that 2.5 million immigrants will cross the U.S. border in 2023, the highest level in more than two decades, with “illegal immigrants from South and Central America and Mexico” accounting for “the most recent Most have skyrocketed.” Federal Reserve Governor Michelle Bowman on Friday pointed to the growth in part-time employment over the past year and said that “the recent strength in job growth may reflect a strong labor supply due to increased immigration.” Bowman warned , if inflation remains stubborn, the Fed may have to raise interest rates again in the future. As political calls for tighter U.S. border controls grow, labor market resilience could be compromised, depending on how big a role immigration plays. Citigroup’s call for the Federal Reserve to cut interest rates by 125 basis points (1.25 percentage points) this year is largely based on a potential deterioration in the labor market, which is completely different from the Wall Street consensus. Futures markets priced in three rate cuts totaling 75 basis points, in line with unofficial estimates released by Fed officials in March. A basis point is one hundredth of a percentage point. “Another strong report raises the possibility that the labor market deterioration we have been anticipating will be averted. But we still see enough weakness in household surveys and elsewhere to lift our base case unemployment rate for later this year. A sharp rise,” Citi economist Andrew Hollenhorst said in a client note. “Normally, much stronger than expected job growth would prompt the Fed to adopt more hawkish (or at least less dovish) policy,” he added. “But that’s not the case right now. Part of the reason is that Fed officials are like us Recognize signs of downside risks to future employment data.”
