Employment – April 2023

Apparent labor market resilience complicates the Fed’s job

• The April jobs report painted a picture of a labor market that is still tight and seemingly resilient. Job growth surprised on the upside with a 253,000 gain, the unemployment rate edged down to a 54-year low of 3.4%, and wage growth accelerated to 4.4%. Importantly though, significant downward revisions to prior employment gains and weak job growth diffusion point to softening momentum that will likely be more visible in the upcoming jobs reports.
• The private sector added a strong 230,000 jobs, and the government sector gained 23,000 jobs. Hiring among goods-producing industries revived amid rising payrolls in construction and manufacturing, while job creation in the services sector picked up, led by stronger hiring in health care and business services. We caution, however, that job gains appear to be more structural than cyclical.
• The employment diffusion index — a measure of how many private sector industries are adding jobs — stood at 57% in April near its lowest post-pandemic level. It remains well below its average of 69% in 2022, indicating that job growth has become significantly less broad-based.
• The unemployment rate fell 0.1 percentage points (ppt) to 3.4% in April, in line with its 54-year low reached in January. The labor force participation rate remained steady at 62.6% but participation among the key prime-age cohort (25- to 54-year-olds) climbed 0.2ppt to a 15-year high of 83.3%. A stronger labor supply is encouraging as it can act as a relief valve against elevated wage pressures. However, participation should come under pressure in coming quarters as conditions worsen and job opportunities become scarce.
• Wage pressures intensified in April. Average hourly earnings rose 0.5% month over month (m/m), the strongest gain since July 2022. As a result, wage growth reaccelerated and rose 0.1ppt to 4.4% year over year (y/y). While the pressure has begun to ease, wage growth remains elevated and well above a rate that would be consistent with the Fed’s 2% inflation target.
• Today’s report indicates that the labor market rebalancing is taking longer than the Fed had hoped. But most other indicators point to a softening in labor market conditions. And our conversation with business executives indicate that companies are adopting increasingly cautious hiring strategies amid deteriorating sales prospects, continued cost pressures and elevated uncertainty.
• Going forward, policymakers at the Fed will tread carefully: in addition to parsing volatile labor market and inflation data, they will need to assess the implications of ongoing tensions in the banking system. With job growth still running at an above-trend pace and inflation and wage growth still too hot, policymakers will maintain a hawkish tilt. It’s too early to assess the likelihood of an additional Fed rate hike in mid-June, but this latest jobs report will push the excessively data-dependent Fed toward further tightening — a mistake in our view.
• We expect the economy will lapse into a modest recession by midyear. The downshift in economic activity should weigh on labor demand and substantially ease the pressure on wage growth in the second half of the year. We anticipate a pullback in hiring as companies grapple with weak demand, falling profitability and tighter credit conditions. The economy is expected to lose 900,000 jobs this year with the unemployment rate rising toward 4.5%.

In the details

The industry breakdown of private payrolls revealed a moderate pickup in hiring among both goods and services-providing industries. On the goods front, construction employment rose by 15,000 jobs reflecting a rebound in hiring of specialty contractors in both the residential and nonresidential sectors. Manufacturing employment rose by 11,000 jobs following an 8,000-job decline in March. Factor activity remains under significant pressure amid slower demand for manufactured goods domestically and abroad, tighter credit conditions, and elevated uncertainty.

Services employment picked up moderately and posted a 197,000-job increase in employment, the largest gain in three months. The health care and social assistance sector was a key driver of job creation last month as the sector added 64,000 jobs following a 48,000-job gain in March. While labor shortages continue to plague hospitals and clinicians, the Job Openings and Labor Turnover Survey (JOLTS) report showed that job openings in health care are down markedly from their peak in March 2022, which should lead to some moderation in hiring. Private sector education employment also rose by a modest 13,000 jobs.

A pickup in employment among business services industries also supported the headline gain as the sector added 43,000 jobs last month, the strongest increase since January. In contrast, leisure and hospitality employment continued to downshift in April and added the least jobs since December 2020.

Sluggish employment trends were again visible in the information sector, which added only 1,000 jobs following a cumulative decline of 25,000 jobs since the start of the year. Meanwhile, the finance sector saw a marked rebound in employment with 23,000 jobs added in April.

Retail employment rose by a tepid 8,000 jobs after shedding 20,000 jobs in March. Retailers, who had gone on a hiring spree during the pandemic to meet strong consumer demand, are recalibrating their workforce amid softer consumer demand and weak economic prospects. Transportation employment increased by 11,000 jobs.

The government sector made another outsized contribution to the overall employment gain and added 23,000 jobs mostly concentrated in state and local governments as they continue to recover the jobs lost during the pandemic.