Employment Report: Let's not panic yet

The March employment report pretty good overall but was a bit disappointing on the top line.

The economy created 431,000 jobs, which was less than expectations of 490,000, but it was still a strong number. The prior two months were revised up by 95,000 jobs. Job gains were widespread, with leisure and hospitality once again leading the way with an increase of 112,000, the most of any single industry.

With March’s report, the economy has now recovered 92.8% of all the jobs lost during the shutdowns of March and April 2020. But there are still 1.6 million jobs to be recovered. The unemployment rate dropped from 3.8% to 3.6%, just above the pre-pandemic level of 3.5%, which was the lowest in over 50 years.

However, the unemployment rate does not take into account the 99 million people who are metaphorically “sitting at home.” Those people are classified as “not participating in the labor force.” Thus the labor force participation rate gives a better picture because it counts the percentage of the population that is participating in the labor force and driving the economy. That number rose 0.1% to 62.4%, up from the April 2020 low of 60.2%. However, it’s still 1% below the 63.4% level from before the pandemic. The drop in Covid cases is contributing to the job gains. The number of people who couldn’t look for a job because of Covid dropped from 1.2 million in February to 900,000 in March.

And that leads us to the Federal Reserve which is supposed to be fighting all that inflation. My latest note of March 17^th discusses in more detail how badly the Fed needs to move but, here is a synopsis.

The Fed has created inflation by leaving emergency policy conditions of 0% rates and massive virtual money printing in place for at least a year too long. It’s the classic formula for inflation. Then the Fed insisted for most of 2021 that inflation was merely “transitory” and would go away soon. Then after they realized it wasn’t transitory at the beginning of December 2021, they still waited for four months before doing anything. In fact, they kept adding to the balance sheet up until the third week of March. And of course, it took them until March 16th to make the first interest rate hike. It’s impossible to reverse those mistakes in a snap. 

So let’s not panic yet. In the near term consumers still do have excess savings to spend, there is work in the pipeline with new orders and backorders near record highs, overall economic demand is strong, high-frequency indicators are all good, Covid is on the run, and the labor market is rapidly creating jobs.

We are in good shape for a while. But the Fed will likely raise the Fed Funds rate too far too fast (it has to now) which will invert the yield curve. In addition, there are some other ominous signs associated with a recession, such as a spike in oil prices, consumer fear of the future, and perhaps a housing bubble. But none of this suggests a recession this year. However, it is quite likely in 2023 – not set in stone – but quite likely.