US employment report puts interest rate cuts back in play

A softer US jobs report today which finally gives the market what it has been hoping for since the turn of the year – signs that US economic activity is finally starting to slow down.

The headline payrolls number printed at 175k, against expectations for 240k, and comprised private sector jobs growth of 167k and only an 8k increase in jobs in the government sector, the smallest rate of growth in the public sector since end-2022. Although today’s report was expected to contain a degree of correction in government jobs from the large 72k increase reported in March, the size of today’s fall suggests that the upwards trend that had been seen in public sector jobs growth has now come to an end, a sector that is typically the last to respond to a change in the economic environment.

Within the private sector, the slowing pace of hiring was broad and spread out across both the goods and services sectors, very much suggestive of an economy-wide slowdown rather than something being contained to just one or two sectors of the economy. With the private sector accounting for around 85% of all jobs in the US, it will be how the job situation here evolves that will be the key driver of the overall unemployment rate and, by implication, Fed policy. Of course, a key component explaining today’s softer print could be the weather, given that favourable weather conditions were largely seen as the main reason for the boost supplied to jobs growth in the construction, leisure and hospitality sectors last month. As such, an element of unwinding was expected today. But our assertion is that this is not the full story as today’s report very much chimes with the messages being seen in employment surveys conducted by the likes of the NFIB, in the Challenger Report and in official WARN notices, all of which have been pointing to a slowdown in hiring intentions and a pick-up in job layoffs for a while now. The clear conclusion is that the US corporate sector is finally starting to buckle under the weight of the monetary tightening delivered by the Fed, and as stocks of excess cash and cheap loans built up and secured during the pandemic period are exhausted, so the now much higher cost of finance is forcing firms to cut costs, reversing the post-pandemic labour hoarding that had been seen and seeing staffing levels scaled back.

Further adding to this picture of a slowing labour market were the earnings numbers, where the downwards trend in average earnings continued, the annual headline figure falling to 3.9%, its lowest pace of growth since June 2021. And the 0.2% increase in monthly average earnings means wages growth on this measure has now fallen to a level that is in line with a 2% CPI target. Of course, the earnings numbers are typically revised and therefore today’s figures cannot be read with any strong degree of certainty yet. But they do show earnings growth following a similar path to that suggested by the Quits rate, which has now fallen to its lowest level since August 2020 (2.1%) and remains on a downwards trajectory. The Fed will want to see this story confirmed by the ECI numbers before buying into it completely, but privately it will likely be viewing today’s numbers with some satisfaction.

On balance, today’s report does not suggest the message given by Powell this week was wrong, i.e., that an interest rate cut should be expected anytime soon. But it does add weight to the picture he painted, namely that the stronger economic data seen over Q1 can be considered as largely ‘bumps’ in the road on the journey towards a looser monetary policy - and this will reignite market expectations that a first interest rate cut might now be delivered as soon as September.