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The Sizzling U.S. Jobs Market

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Will the booming U.S. employment market fuel higher wages, higher inflation, and higher interest rates?

The Department of Labor’s March establishment survey, based on data gathered from businesses, showed that American employers added back nearly half a million jobs and are now just 1.5 million jobs below peak employment.

Graphic: U.S. Non-Farm Payrolls: Private Sector Jobs

Graphic: U.S. Non-Farm Payrolls: Private Sector Jobs

The separate household survey showed that the U.S. added back nearly 750,000 jobs in March and that the unemployment rate fell from 3.8% to 3.6%, close to a 50-year low. For the first week of April, jobless claims came in at just 166,000, the lowest level since 1968 when the job market was less than half its current size.

Graphic: Household Survey: Labor Force and Employment Total

Graphic: Household Survey: Labor Force and Employment Total

And the JOLTS survey shows that employers are looking to add 11.7 million new workers. But how are they going to find 11.7 million new workers when the economy is within 1.5 million jobs of being at full employment? The answer might be to entice workers with higher wages. Average hourly earnings rose by 5.6% in the year ending in March, the fastest rate in decades, and wages might grow even more quickly as employers compete over scarce workers. But even those strong wage gains are falling short of inflation, which is running at close to 8%. 

Graphic: U.S. JOLTS Job Openings and Labor Turnover

Graphic: U.S. JOLTS Job Openings and Labor Turnover

The state of the labor market, wages, and inflation has fueled a dramatic change in investors’ outlook for Fed rates. As recently as six months ago, traders didn’t price even one Fed rate hike during the coming year, according to the CME FedWatch Tool. Now the tool suggests traders expect rate hikes in increments of 50 bps, and that the Fed might raise rates to over 3% in 2023.

Graphic: Continuous Fed Funds Futures 1Y and 2Ys Out

Graphic: Continuous Fed Funds Futures 1Y and 2Ys Out

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