The US jobless rate likely fell to its pre-pandemic low of 3.5% in April, while job growth moderated to a still-vigorous pace amid widespread worker shortages, underscores the challenge the Federal Reserve faces in curbing high inflation.
Friday’s closely watched Labor Department employment report is also expected to show wages rose solidly last month and highlight the economy’s strong fundamentals despite a drop in gross domestic product in the first quarter. .
“Consumers have money to spend and businesses are trying to hire people, but the labor shortage, if anything, is getting worse,” said Sung Won Sohn, a finance and economics professor at Loyola Marymount University in Los Angeles. . “I think we are seeing the beginning of a wage price spiral, and it will be a tough nut to crack, even for the central bank.”
Nonfarm payrolls probably increased by 391,000 jobs last month after rising 431,000 in March, according to a Reuters survey of economists. That would mark a slowdown in the first-quarter average gain of 562,000 jobs per month and break an 11-month payroll gain streak of more than 400,000. Estimates ranged from a low of 188,000 jobs added to a high of 517,000.
The unemployment rate is expected to drop to 3.5%, which would be the lowest level since February 2020. The unemployment rate was 3.6% in March and has fallen four tenths this year.
There were a record 11.5 million job openings on the last day of March, widening the gap between jobs and workers to a record 3.4% of the workforce from 3.1% in February.
The Federal Reserve on Wednesday raised its policy rate by half a percentage point, the biggest increase in 22 years, and said the US central bank would start cutting its bond holdings next month. It started raising rates in March. Fed Chairman Jerome Powell told reporters that “the labor market is extremely tight and inflation is too high.”
There is concern that the Fed could raise rates too high and stifle economic growth. Although GDP contracted in the first quarter under the weight of a record trade deficit, domestic demand was strong, with consumer spending rising and business investment in equipment accelerating.
Some of the anticipated slowdown in payrolls last month would also reflect a seasonal quirk. April is one of the strongest months for job growth, which is typically anticipated by the seasonal adjustment factor, the model the government uses to remove seasonal fluctuations from the data.
Unadjusted payrolls for seasonal fluctuations generally topped 1 million in April, with the exception of 2020, when the COVID-19 pandemic was at its height.
“The seasonal adjustment factor anticipates strong hiring in April and, on average, has reduced seasonally adjusted employment by 820,000,” said Ryan Sweet, senior economist at Moody’s Analytics in West Chester, Pennsylvania. “Therefore, we assume another 800,000 seasonal adjustment factor carryover in April.”
The growing shortage of workers was evident this week in other labor market reports, all of which pointed to slower job growth in April. With the gap between labor supply and demand widening, wages likely maintained their strong pace of growth.
Average hourly earnings are forecast to rise 0.4%, matching March’s gain. That would reduce year-on-year wage growth to a still solid 5.5% from 5.6% in March. But wage growth could surprise to the upside as the survey period for the April employment report included the 15th of the month.
Compensation for US workers posted its biggest increase in more than three decades in the first quarter, helping to support domestic demand.
“After a very strong increase in labor costs in the first quarter, evidence of upward wage pressures continuing into the second quarter would keep risks tilted toward a more aggressive Fed,” said Veronica Clark, Citigroup economist in New York.
Although Powell said on Wednesday that a 75 basis point rate hike was not on the table, some economists believe the Fed could raise its benchmark interest rate above its estimated neutral rate of between 2% and 3%.
Other details from the April employment report were likely strong. The average work week is expected to have risen to 34.7 hours from 34.6 hours in March. The steady stream of workers returning to the workforce likely continued last month as well. A total of 722,000 people entered the labor force in February and March.
With annual inflation rising at its fastest pace in more than 40 years, the rising cost of living is drawing some former retirees back into the workforce.