U.S. Non-Farm Payrolls Surged by 178k in March; Impact of Iran Conflict May Become Evident

After an end to the medical staff strike and a warming in the weather, the U.S. saw its March nonfarm payroll rebound exceed expectations by more than expected. The unemployment rate edged down somewhat. However, the overall employment environment—nearly stagnant—remains unchanged. Given that there are still no clear signs of an end to the war with Iran, downside risks to the labor market are continuing to build. For the Federal Reserve, considering that inflation pressure may gradually become more apparent, watchful waiting and holding off are likely to remain the overarching tone of the near-term policy stance.

Unexpected jump beyond expectations

The U.S. Bureau of Labor Statistics reported Friday that, after adjusting for seasonal factors, the number of nonfarm jobs in March increased by 178k. This reversed February’s decline of 133k and also beat the market consensus expectation of 59k. The January figure was revised up by 34k to 160k, with the average monthly increase in the past three months around 68k.

This data indicates that even if the U.S. economy is once again thrown into uncertainty due to Iran-related conflict, the labor market still remains resilient. Steve Sosnick, chief strategist at Interactive Brokers, commented that, “Right now, we can dismiss the narrative that the labor market is headed into a recession. The numbers in this jobs report are far above expectations. The month-to-month revisions are fairly large, but the combined revisions over the two months are very small. No matter how you look at it, this report looks solid.”

As in the past, the healthcare sector remains the main contributor to job growth, adding 76k positions. A strike by healthcare provider Kaiser Medical Group in February had a negative impact on the sector. Last month, outpatient healthcare services added 54k, including 35k employees who returned to work after the strike ended. Construction added 26k, while transportation and warehousing added 21k.

On the decline side of employment, the federal government shed 18k jobs, and the financial sector lost 15k.

The unemployment rate edged down to 4.3%, but to a large extent this was because the labor force population fell sharply. However, the labor force participation rate for the working-age population dropped to 61.9%, the lowest level since November 2021. Household survey data used to calculate the unemployment rate showed that the number of employed people fell by 64k. The number of people unemployed for the long term remains high; the average number of weeks unemployed edged down slightly to 25.3 weeks.

Notably, wage growth was also below expectations. The average hourly earnings rose just 0.2% in the month, and increased 3.5% year over year, the lowest since May 2021. The market had previously expected 0.3% and 3.7%, respectively. Average weekly hours fell to 34.2, down 0.1 from February.

A bleak outlook for rate cuts

First Financial reporter compiled findings showing that the market widely believes that the growth in headcount this time is unlikely to be sustainable and is more of a one-off phenomenon, mainly driven by special factors such as employees returning to work in the healthcare sector.

Structurally, overall employment growth is still confined to only a handful of industries. Data released by the U.S. Bureau of Labor Statistics this week showed that the number of job openings in February recorded the largest decline in nearly a year and a half, indicating that labor demand is weakening. “Everything is moving extremely slowly, uncertainty is everywhere, and we are still deporting immigrants,” said Ron Hetrick, a senior labor economist at Lightcast.

Other economists believe that the U.S. economy is already in a state of full employment, and that most workers who want jobs are already employed. Slower hiring is mainly due to insufficient labor supply, partly stemming from the White House’s immigration restriction policies.

However, the Iran conflict could bring new uncertainty, making companies more cautious when hiring. The impact from the conflict may be more clearly reflected in April’s employment report. At the end of February, the U.S. carried out strikes against Iran with Israel, pushing global oil prices up by more than 50%, and U.S. domestic gasoline prices also rose accordingly. This week, the nationwide average retail gasoline price in the U.S. topped $4 per gallon for the first time in more than three years. This will raise inflation, erode household purchasing power, offset some of the positive benefits from wage growth, and slow consumer spending.

“Last year, we already saw that uncertainty makes businesses passive when it comes to hiring,” said Sofia Korneyldeman, a senior economist at FHN. “Last year’s main uncertainties were about tariffs; this year, it’s how the Middle East conflict and rising oil prices will affect things.”

Since the pandemic, the structure of the U.S. labor market has been changing. Now, adding fewer jobs is enough to keep overall employment stable. Wall Street economists estimate that labor supply growth is at a historical low, meaning that it would only require adding fewer than 50k jobs per month to keep pace with the growth of the working-age population. The Federal Reserve Bank of St. Louis recently estimated that adding only 15k jobs is sufficient to keep the unemployment rate steady. A JPMorgan economist warned that, “Negative month-over-month employment growth will become more common in the future. Even if employment growth is enough to stabilize the unemployment rate, there could still be at least one-third of the time when employment contracts.”

In the recent period, when setting interest-rate policy, Federal Reserve officials have been weighing employment data. Most policymakers lean toward waiting for the data and staying patient, but a small number have called for rate cuts to guard against labor-market weakness. Given that inflation is still far above the Fed’s target, and that the Iran conflict has continued to drive energy prices higher, markets expect the Fed is likely to do nothing this year. The CME Group’s Fedwatch tool shows that after the employment data was released, markets considered the probability of the Fed raising or cutting rates at the April 28–29 Federal Open Market Committee meeting to be essentially zero, and there is nearly an 80% chance the Fed will keep rates unchanged through the end of the year.

Mark Luskin, chief investment strategist at Janney Montgomery Scott, said that the data overall is solid enough to allow the Fed to continue to stand pat. “The data revisions dilute how striking the numbers look, and the slowing pace of wage growth may indicate some easing in the labor market. But the core point is that the unemployment rate has not risen significantly, which is a positive signal for the economy.”

Duty editor: Qi San

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