US Job Growth Slows in April Amid High Interest Rates and Inflation

The US labor market is showing signs of cooling, with employers adding only 175,000 jobs in April, falling short of economists' expectations. Data released by the Labor Department on Friday reveals that the pace of job growth has slowed to its lowest level in six months, while the unemployment rate ticked up to 3.9%, surpassing market projections.

Why this matters: The slowing job growth and rising unemployment rate have significant implications for the overall health of the US economy, as a strong labor market is vital for sustaining economic growth. Moreover, the Federal Reserve's decision to hold interest rates steady may impact employers' ability to expand their businesses, potentially leading to a ripple effect on the entire economy. Moreover, the Federal Reserve's decision to hold interest rates steady may impact employers' ability to expand their businesses, potentially leading to a ripple effect on the entire economy.

Despite the slowdown, the labor market has demonstrated remarkable resilience, with the unemployment rate maintaining a 27-month stretch below 4%, the longest such period since the 1960s. Average hourly earnings rose by a modest 0.2% from the previous month, indicating a slight easing of wage pressures.

Joseph Brusuelas, chief economist at RSM US, believes that this development "should play into a repricing of risk which had moved too far in the direction of rate hikes and stagflation, which the economic data simply do not reflect." The healthcare sector led job creation in April, adding 56,000 positions, followed by social assistance, transportation and warehousing, and retail. The construction and government sectors also experienced modest gains, adding 9,000 and 8,000 jobs, respectively.

While the labor force participation rate remained unchanged at 62.7%, a more comprehensive measure that includes discouraged workers and those holding part-time jobs for economic reasons edged up to 7.4%, its highest level since November 2021. This suggests that some individuals who had previously given up on finding work are now reentering the labor market.

The Federal Reserve's decision to hold interest rates steady at 5.25% to 5.5% on Wednesday, the highest level since 2001, reflects the central bank's efforts to strike a balance between a strong labor market and the goal of reducing inflation. However, this pause in rate hikes may impact employers seeking credit for business expansion, as they continue to struggle with elevated borrowing costs.

Dan North, senior economist at Allianz Trade, puts the current situation into perspective, stating, "We've had interest rates jacked up pretty high, so you would expect to see the labor market slow down a little. But we're still at pretty high levels."

Inflation remains a pressing concern, with the core personal consumption expenditures index jumping 2.7% from a year earlier in March. Although average hourly earnings grew by 3.9% on an annual basis in April, economists stress that year-over-year increases in hourly pay must slow to around 3.5% to align with the Fed's 2% inflation target.

Seema Shah, chief global strategist at Principal Asset Management, sees the April jobs report as a positive development for the Federal Reserve, stating,"The first downside payrolls surprise in several months, with a dip in average hourly earnings growth, will bring the rate-cutting dialogue back into the market and perhaps explains why Powell was able to be dovish on Wednesday. The US navigates this challenging economic environment, striking the right balance between curbing inflation and maintaining a healthy labor market remains vital. The coming months will provide further insight into the effectiveness of the Federal Reserve's monetary policy actions in guiding the economy towards sustainable growth without triggering a recession.

Key Takeaways

• US labor market cools, adding only 175,000 jobs in April, below expectations.
• Unemployment rate rises to 3.9%, surpassing market projections.
• Average hourly earnings grow 0.2% from previous month, easing wage pressures.
• Federal Reserve holds interest rates steady, potentially impacting employers' expansion plans.
• Inflation remains a concern, with core PCE index jumping 2.7% from a year earlier.