Despite Strong Jobs Report, Fed Still Seen on Track to Cut Rates

The monthly jobs report once again defied expectations for a slowdown in hiring. But for now, a rate cut from the Federal Reserve is still in the cards for June.

The US economy added a robust 303,000 jobs in March, according to the latest report from the Bureau of Labor Statistics. That was much hotter than the economist consensus for a 200,000-job increase recorded by FactSet.

“There is no weakness in the job market which would impel the Fed to quickly cut, but no tightness which would prohibit a cut either,” says Preston Caldwell, Morningstar’s chief US economist. Though job growth was stronger than expected in the first quarter, Caldwell sees that trend turning. “We continue to expect a slowdown in job growth in the second half of 2024 through early 2025 in response to slowing economic growth over the same time frame,” he explains.

Regarding the Fed, Caldwell points to upcoming inflation data as key to its decision on cutting interest rates. “Today’s jobs data shouldn’t tip the Fed one way or another in upcoming decisions,” he says.

This coming Tuesday will bring the March Consumer Price Index report, while the Fed’s favored inflation measure, the personal consumption expenditures price index, will be released on April 26. The Fed’s next policy-setting meeting will conclude on May 1.

March Jobs Report Key Stats

• Total nonfarm payrolls rose by 303,000, above the FactSet consensus forecast of 200,000
• The unemployment rate edged down to 3.8% from 3.9% in February, as expected.
• Average hourly wages grew by 0.3% to $34.69 after rising 0.2% in February.

The larger-than-expected March gain follows a 270,000 increase in February and an upward-revised increase of 256,000 in January.

Caldwell notes that nonfarm payroll employment growth ticked to a 2.1% annualized rate in the three months ending in March, up from 1.6% in the prior three months. Measured year over year, job growth is 1.9%, and it’s hovered there since the second half of 2023. “In our assessment, the underlying trend for employment right now is a steady but brisk rate of growth, slightly above the 1.7% averaged over 2015-19 before the pandemic,” says Caldwell.

Healthcare, Government, and Construction Lead Hiring Gains

The March jump in hiring was led by healthcare, government, and construction, according to the BLS. Health jobs rose by 72,000 in March, above the average monthly gain of 60,000 over the last 12 months. Local government hiring grew by 49,000 and federal government hiring by over 9,000. The construction sector added 39,000 jobs, roughly twice the average monthly pace for the last 12 months.

The increase in construction hiring could be a lagged response to the nonresidential construction boom in the second half of 2023. “But construction spending has slowed in recent months’ data, which should continue in 2024, given weakness in commercial real estate markets,” Caldwell says. He also noted that over the last three months, hiring has picked up in retail and transportation. “However, growth in these areas will slow if the nascent deceleration in consumer goods demand persists.”

Unemployment Rate Dips In March

The unemployment rate edged down to 3.8% in March from 3.9% in February. “The unemployment rate has been in a narrow range of 3.7%-3.9% since August 2023,” the BLS noted in the report.

Data for the jobs report is collected in two parts. For payroll data, businesses are asked about hiring through the establishment survey. Meanwhile, unemployment data is derived from a separate survey of households. The two reports have been showing diverging trends in hiring.

“It’s hard to gauge where labor supply is coming from because the household survey has not captured the employment expansion,” Caldwell explains. “There’s a large gap between the household survey’s measure of employment and the headline nonfarm payrolls from the establishment survey. Even though that gap partially closed in March, still household employment was up just 0.4% year over year, well below the 1.9% year-over-year growth for nonfarm payrolls. The household survey is likely under-measuring immigration and perhaps gains to labor force participation.”

Wage Stats Offer Good News for Inflation Outlook

In March, average hourly earnings rose by 12 cents, or 0.3%, to $34.69. Over the past 12 months, average hourly earnings have increased by 4.1%, the BLS reported.

“Wage growth remains moderate, suggesting labor supply is amply meeting demand,” Caldwell says. Average hourly earnings growth is at 4.1% both over the last three months annualized and on a year-over-year basis. Caldwell says this rate of increase is not far above one consistent with the Fed’s 2% inflation target for the PCE price index.

Fed June Rate Cut Still On the Table

Even with yet another strong jobs report, the door remains open for the Fed to lower interest rates at its June meeting. The federal-funds target rate range has been at 5.25%-5.00% since last July. However, in the bond futures market (where traders place bets on the direction of interest rates), expectations have diminished for a June cut. Before the March report, traders saw a 59% chance of a quarter-point rate cut in June, according to the CME FedWatch tool. Those odds are now down to 50%.

But Caldwell thinks the jobs report won’t take the Fed off its expected course for rate cuts in 2024. “Fed decisions in upcoming meetings will hinge mainly on the inflation data,” he says. “If the next few months show core PCE inflation averaging close to the Fed’s 2% target, as we expect, then the Fed should be clear to cut in its June meeting. Even with growth in employment and economic activity running at a healthy pace, normalizing inflation would call for the Fed to lower rates from currently restrictive levels.”