A tight US labour market despite higher interest rates
The US labour market is past its peak, but still remains very tight despite higher interest rates.
The next FOMC meeting is on 2-3 May, with the Fed likely to raise the funds rate by another 25bp to a range of 5-5¼%.
Ahead of that meeting, the latest payrolls report indicates that the US labour market remains very tight, but that wages growth has slowed sharply, albeit with a key caveat about potential revisions.
- Growth in payroll employment has slowed to an annualised 2½% in monthly trend terms, which is about double pre-pandemic rates, while the unemployment rate remains stuck at a very low 3½%.
- Wages growth, as measured by private-sector average hourly earnings, is extremely volatile, but has slowed to about 3¼% on an annualised monthly trend basis, which is down from more than 4% at the end of last year and similar to pre-pandemic experience.
Using these numbers to update the Fed’s estimates of the demand and supply of labour, demand is measured as employment plus job vacancies, while supply is employment plus unemployment, which can be extended over recent years to include people who have left the workforce but would still like a job.
The demand for labour exceeded supply by a record margin last year when scaled by the working-age population. Demand has since eased relative to supply, mainly because job vacancies have fallen from an all-time high, but still remains well above any pre-pandemic point in the post-WW2 period, which indicates that the labour market remains extremely tight.
For the Fed, sensitivity results from its main macroeconomic model indicate that the unemployment rate should have been rising steadily by now in response to higher interest rates, so the low result suggests that the economy still retains more momentum than had been expected by either policy-makers or the market.
As for the extent of the recent sharp slowdown in wages growth, this seems at odds with the tightness of the labour market and there is a risk that it is revised at a later date.
This is because the Bureau of Labor Statistics reports that the initial survey response rate for both payroll employment and average hourly earnings has fallen from c75% ten years ago to c50%, rising above 90% after a couple of months on late survey responses.
In contrast, the response rate for the unemployment rate has also fallen from c90% ten years ago, but to a still-high level of c70%.
Employment growth remains strong
The unemployment rate is extremely low
The demand for labour has eased, but remains well in excess of supply
Hourly wages growth has slowed sharply, contrasting with the low unemployment rate
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy, contributing to the investment decisions of the firm. Kieran has long experience as a macroeconomist in both the private and public sectors. He has worked most recently as Chief Markets Economist for National Australia Bank and was previously Chief Economist, Australia and New Zealand, for Barclays Bank and ABN Amro Bank/RBS. Kieran also worked as Principal Adviser on the macroeconomy and budget policy in the Commonwealth Treasury and Director of Forecasting.
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Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
Based in Sydney, Kieran Davies is Chief Macro Strategist at Coolabah Capital Investments, an asset manager with 40 executives and over $8 billion in fixed-income strategies. Kieran is responsible for macroeconomic research and investment strategy,...
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