The economy is expected to have added 400,000 more jobs in April, reflecting a very tight labor market, but economists say the number of new hires could start to slow from here.
A slowdown could be welcome given fears that the labor market has gotten too hot and could drive up inflation – and potentially lower corporate profits – if wages continue to rise. Recent government data shows the labor shortage is getting worse, with the gap between job vacancies and available workers hitting a record 5.6 million in March.
“The labor market continues to roll. We need, at this point, to slow down a bit because we are going to pass full employment and inflation is going to become a bigger problem than it already is,” said Mark Zandi, chief economist at Moody’s Analytics. “At the end of the day, we have to come up with something that doesn’t go over 100,000 a month.”
According to Dow Jones, the jobless rate is expected to fall to 3.5% in April from 3.6% in March. The April jobs report is released at 8:30 a.m. ET on Friday.
Economists polled by Dow Jones expect employers to have added 400,000 jobs to nonfarm payrolls, down slightly from 431,000 in March. If the payroll reaches the expected level, it would be the eleventh consecutive month of job creation at 400,000 or better.
Wages are expected to rise at a rate of 0.4%, or 5.5% year over year, the same pace as the previous month.
In a turbulent financial market driven by the pace of inflation, the salary component of the report is likely to be the most important factor.
Markets were shaken on Thursday after the Bureau of Labor Statistics reported that unit labor costs jumped 11.6% in the first quarter as productivity plummeted. This reflects a 3.2% increase in hourly compensation on top of a 7.2% drop in productivity and is the largest four-quarter increase in unit labor costs since 1982. The decline in productivity was the most pronounced in 75 years.
“I don’t think they want to see a surprise on the upside of wages, especially in the wake of the cost of labor rising to its highest level in 40 years,” Peter Boockvar said. , Chief Investment Officer of Bleakley Global Advisors. “I think there’s a feeling that even though [April’s] the number is really good, growth is starting to slow down, and we know the jobs data is a lagging indicator…if it’s weaker, we could say there aren’t enough workers. I think that’s the salary that people are going to focus on the most, and it goes to the whole salary spiral debate.”
Zandi said he doesn’t think wages are driving inflation yet, but if the labor market doesn’t cool down, it could happen. “Inflation is 8%. Wage growth is 5%. You don’t want to see this for very long,” he said. “We’re going to start to see inflation come in and fall below wage growth as we approach next year…It’s fair to say that inflation is driving wages. Wages are not not the engine of inflation, at least not yet.”
If that were to happen, that’s when you get the “dreaded wage and price spiral,” Zandi said. At that time, the Federal Reserve should become even more aggressive with its rate hikes.
“The risks of recession then become even greater,” he said. “You don’t want a booming economy. You want a stable economy that’s running full steam ahead. That’s what the Fed is striving for.”
Diane Swonk, chief economist at Grant Thornton, said labor market turnover is one of the factors hurting productivity.
“You want a more balanced situation where wages outpace inflation because workers are more productive, but that’s not where we are today,” Swonk said. “Where we are today is the erosion of the standard of living and that is important.”
Swonk said there were 1.9 job openings for every worker, down from 1.2 before the pandemic.
“That’s why the Fed has put the labor market in its sights and talked about reducing demand, but it’s hard to see how we’ll go from 1.9 to 1.2 job openings per worker” , Swonk said. “It’s hard to see that happening without hammering demand and increasing supply.”
Fed Chairman Jerome Powell repeatedly commented on labor market tensions during his Wednesday briefing, following the Fed’s half-point interest rate hike.
“If wages and jobs are strong in the first quarter, but growth is slowing, that means unit labor costs are rising,” said Jim Caron, head of macro strategies for global fixed income. at Morgan Stanley Investment Management. “What this is starting to show is wage inflation, which Powell was talking about yesterday.”
After the release of productivity and labor cost data on Thursday morning, bond yields soared. The 10-year Treasury yield rose about 9 basis points from Wednesday to 3.05% in Thursday afternoon. One basis point equals 0.01%. The S&P 500 fell 3.6%.