Job Market Cools – Which Should Please the Fed

After 3 months of torrid growth in the first quarter of 2024, the job market finally cooled a bit in April:

Payroll growth rose by 175,000. This is still a very positive number for being at this stage of the business cycle. But it is below last month’s huge gain (revised up to 315,000), and below economists’ expectations (about 240,000). With these new numbers, gains over the past 3 months now average 242,000, which is similar to 2023.

Very few sectors saw strong job growth, which the exception of health care (+56,000). Employment in retail trade and transportation/warehousing each grew by about 20,000; but other sectors that had experienced strong recent job growth, like leisure/hospitality and government, grew much more slowly.

Importantly, wage growth also slowed. On an annualized basis, wage growth in April was just 2.4%, and it has averaged 3.3% over the past 2 months. And unemployment ticked up slightly, to 3.9%. Other measures of labor force participation and employment held steady.

I believe these first signs of labor market cooling will be welcomed by the financial markets and the Fed. Over the first 3 months of 2024, compensation growth had risen more quickly – by about 4.7% on an annualized basis. Lower productivity growth in the first quarter – at just .3% – was also disturbing, since productivity growth helps keep earnings growth from becoming inflationary. Still, over the past 12 months, productivity growth has risen by a very health 2.9%.

And another labor market measure also showed some cooling this week. The job vacancy rate declined to 5.1%, the lowest rate in over 3 years.

Of course, one should never put too much weight on data from a single month. Monthly employment data bounce around quite a bit, and we don’t yet know if these signs of cooling will persist in May and beyond.

Still, for a Federal Reserve that has been reluctant to cut interest rates because of renewed signs of inflation in early 2024, the cooling that we find in this report should be welcome news. It might reflect the first signs in 2024 of a job market that is finally slowing a bit and not contributing to inflation. If we can maintain the high productivity growth of 2023, that will also help.

Time will tell if these signs of a cooling job market will be sustained in the late spring and summer months.