Weekly Economic Trends and Indicators

The Headline:

According to the Bureau of Labor Statistics, the U.S. economy added a net 253,000 jobs in April as the unemployment rate remained essentially unchanged, moving from 3.5% down to 3.4%. February and March job increases were revised downward by 149,000. Average hourly earnings increased by 0.5% in April, compared to a 0.3% increase in March as inflationary pressure continues to push wages higher.

The Details:

On the face of it, this report suggests that the labor market juggernaut continues to roll. However, there is reason for some caution based on other data. As was pointed out last month, the Job Openings and Labor Turnover Survey (JOLTS) can help give some insight into where the labor market is going. Job openings were down another 384,000 in March (following a 632,000 drop in February). The drop in job openings was shared widely across most sectors with leisure and hospitality once again going against the trend and increasing seasonally adjusted job openings by 5.5% in March continuing their post-COVID recovery.

The Context

As expected, the Federal Reserve raised the target for the fed funds rate by 25 basis points on Wednesday. Will this be the last rate increase for a while? Possibly. A couple weeks ago, most analysts were expecting a pause after the May meeting with a minority expecting another hike. After Friday the sentiment was overwhelmingly for a pause. The totality of the information we have now points to a pause. The strong labor market notwithstanding, we have slowing GDP growth, decreasing job openings, downward employment revisions, and continued concerns about regional banks following this week’s acquisition of First Republic by JPMorgan.

Before the next Fed meeting, we will have three more important data points: April CPI, May employment, and May CPI. Two additional data points on inflation will help to clarify whether the Fed’s interest rate increases have had the desired effect. If it is apparent that inflation is continuing to fall, that may give the Fed the cover that it needs to be able to pause the rate increases. However, if inflation does not decrease appreciably, and if we see a similarly strong May employment report, a rate hike in June may still be on the table.

That outside possibility of another rate hike is concerning to many analysts because weakness in the banking sector and the lagged effect of interest rate increases on the real estate market could lead to a credit crunch this summer we do not get a pause in the rate increases. The hope has been that inflation would respond quickly enough that the Fed could stop raising rates before provoking a recession. The longer inflation takes to respond, the more the Fed will increase rates, because they have made it clear that is their priority. The higher rates go, the greater the probability of recession.

Next week: April inflation update