Macro Analysis /
United States of America

Data Comment - US Payrolls: Another solid report that raises the probability of a 50bp hike

    Daniel Vernazza
    Daniel Vernazza

    Chief International Economist

    1 April 2022
    Published byUniCredit
    • The US economy added a solid 431k jobs in March. Payrolls in the prior two months were revised up a net 95k, with payrolls in February now estimated to have risen 750k instead of the initial estimate of 678k. Payrolls are still 1.6mn below their pre-pandemic level in February 2020, but at the current 3-month pace of job creation, the gap would be closed in just three months. The largest monthly payroll gains in March were for leisure and hospitality (+112k), professional/business services (+102k), retail trade (+49k) and manufacturing (+38k).
    • There is plenty of evidence to suggest that the labor market is very tight, or "exceptionally tight" in the words of Fed Chair Jerome Powell. The unemployment rate fell more than expected, by 0.2pp to 3.6% in March. It is now just 0.1pp above the FOMC’s median projection for the end of this year, and 0.4pp below the FOMC’s estimate of the longer-run equilibrium unemployment rate. The labor force participation rate continues to edge up, by 0.1pp to 62.4% in March. It suggests labor supply shortages are easing, although the participation rate is still some way below its pre-pandemic level of 63.2%. Around half of the fall in participation compared to pre-pandemic levels is due to a rise in early retirement, and most of these people seem unlikely to return to the labor force. Reflecting population ageing and a declining equilibrium participation rate, the gap between the actual participation rate and the CBO’s estimate of the equilibrium participation rate is almost fully closed.
    • Average hourly earnings rose 0.4% mom in March after an upward-revised 0.1% mom rise in February. The year-on-year growth rate rose to 5.6% from 5.2% in February. High pay growth reflects the imbalance between very strong labor demand (as evident in near record job openings and low unemployment) and still reduced labor supply compared to pre-pandemic levels (as evident in lower labor force participation), but it is still running below CPI inflation of 7.9% yoy (February figure), which means real incomes are falling. On a month-on-month basis, average hourly earnings growth appears to be easing, since the average of the last two months is 0.25% mom, compared to an average of 0.45% mom in the prior ten months. By industry, pay growth has been highest for below-average pay sectors, although only the leisure and hospitality sector is currently posting wage growth in excess of headline CPI inflation.
    • Given the strength of the labor market and inflation well above target, the probability that the Fed raises rates by 50bp at its next meeting in May – which is our baseline – is rising.