March jobs report: Healthy labor market, slower supply, more volatility

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Sam Azzarello: Welcome to J.P. Morgan's Making Sense. I'm Sam Azzarello, head of Content Strategy for Global Research, and today I'm joined by Michael Feroli, Chief U.S. Economist, to discuss key takeaways from the March employment report. Mike, thank you for joining us.

Mike Feroli: Thanks for having me.

Sam Azzarello: I'd like to start with a high-level summary of the March employment report. The number came in above expectations. What particularly stood out to you from the report, and is there anything you'd like to share on where jobs were created and destroyed?

Mike Feroli: Yeah. So as you say, it was a very strong number, 178,000 jobs created. That was more than double expectations. Uh, a lot of where we saw the job growth was in categories that unwound some of the weakness that we saw in February. February was actually revised down to minus-133,000. Uh, but in March, uh, we saw some of the categories that seemed to be impacted by adverse weather in February, like construction and leisure and hospitality turn, uh, bounced back pretty sharply. And there was also a strike that affected, uh, healthcare in February. The unwind of that effect really supported March. So I think you really do probably have to average the March and February numbers together, and when you do that, you get a number that's kind of like we've seen over the last year, which is, you know, between zero and 50,000.

Sam Azzarello: So as you highlighted, the data has been volatile over the last few months, and there's been revisions. I guess, how do the latest developments from March inform your expectations for the broader labor market outlook from here?

Mike Feroli: You know, I don't say, I don't think there were major surprises. I think we continue to look for numbers like we saw today, or, or like (laughs) we've been averaging over the last few months, continue for the rest of the year. I do think, and I should have mentioned this earlier, that it was comforting to see that the unemployment rate came down to 4.3%. That's off a high of 4.5%, uh, just a few months ago, and so, it does raise some hopes that maybe we've seen the peak, uh, in the unemployment rate. But overall, we're still looking for a relatively healthy, uh, job market for much of the year, though, obviously we have some bumps perhaps coming ahead.

Sam Azzarello: You recently wrote a piece on labor supply, noting that growth has been historically low and how that may continue absent a rebound in participation. Can you explain this dynamic for listeners and what it may mean for interpreting labor market data going forward if negative payroll readings become more common due to slower labor supply growth?

Mike Feroli: Right. So, over the last... I think what we're talking about here is that demographics over the last several years, several decades, actually, have been pointing to slower, native growth in the labor force, and then you combine that with a pretty large change in immigration policy such that, immigrant labor supply is no longer offsetting, uh, the slowing in native-born labor supply and such that right now, the labor market probably only needs to absorb, as I said, between 50, zero and 50,000, uh, people per month to, uh, absorb new entrants into the labor force, which is obviously quite a, a bit lower number than we grew up with. And what that means is that just given the normal, um, sampling error and variability in the data, that we're more likely to see negative numbers even in periods when everything is actually okay. And again, that's a big change, I think, from, uh, what we experienced, you know, just a few decades ago.

Sam Azzarello: There have also been growing concerns about AI's expanding role in corporate job cut plans, underscoring its position within the current zeitgeist. How are you thinking about the interplay between the labor market and AI productivity gains? Any insights on the impact of AI on future employment trends?

Mike Feroli: So, I would say we're thinking most of, uh, AI is probably in the future and not in, uh, in the data we're already seeing. Now there are some hints that we're already seeing some AI effects in the labor market. So, recently we've, even in the March employment report, we, uh, saw that professional and technical business services employment is declining. Uh, college-educated unemployment, particularly for young people, seems to be continuing to rise. And so these are some hints that, uh, AI may be affecting certainly the composition of job growth. And I think that's what we expect going forward is that this is going to be more an issue of composition rather than overall levels of of employment, and that historically when you have new technologies, uh, market forces are such that they realign, uh, where labor goes, but that we'll continue to need, need labor to perform some of the tasks in this economy.

Sam Azzarello: Very interesting. Let's chat about the health of the U.S. consumer, shall we? How do you see U.S. consumer sentiment and spending evolving, and can you expand on how any forecasts may have shifted given Middle East tensions and any escalation we might see there?

Mike Feroli: Yeah, sure. So, up through the beginning of this conflict, uh, consumers seemed to be doing pretty well. Uh, February, um, spending was good. Sentiment was, eh, fine. Um, uh, even early signs of March look okay. So we have, uh, auto sales already for March, which we're strong. Um, Chase card spending data looks okay. Uh, all that being said, we do have some concerns about how consumers, uh, may fare in, in April and May, uh, because as you, uh, alluded to, energy prices are up significantly on the back of this conflict, gasoline prices roughly going from $3 a gallon to $4 a gallon, which will be a drain on consumers' purchasing power, and we have incorporated that in our forecast. And we do think that the next few months, uh, will look a little softer, uh, but presumably if the conflict ends, you know, within a certain (laughs) time period, uh, we do think we get back to better numbers in the second half of the year.

Sam Azzarello: Okay. As the Fed prepares to meet later this month, what key takeaways, if any, from the March jobs report do you expect will influence their thinking on rate policy?

Mike Feroli: Yes, I, I would say before this, uh, before the March jobs report, the Fed, most Fed officials were pretty comfortable being on hold. I think this will, uh, reinforce that tendency, uh, to the extent it lowers some of the concerns about downside employment risks, which, uh, had been apparent after the February report, maybe not so glaring now, uh, and will allow them, I think, to be a little more focused on, um, the upside inflation risk. So that may bias them a little bit toward, you know, guiding away from, uh, uh, more cuts this year, uh, which has been the general direction of Fed rhetoric, uh, even before, before the March jobs report, and I would say even before the conflict in the Middle East broke out.

Sam Azzarello: And last question for you. Let's zoom out. How would you summarize your base-case view on the outlook for the U.S. economy?

Mike Feroli: Uh, we think it's pretty favorable still. Uh, as I mentioned, second quarter may be a little softer because of the higher, the impact of higher energy prices. Uh, that being said, we do think fundamentals still look pretty solid. Uh, consumers are in a good position, CapEx is being supported by the AI boom, uh, and productivity trends have been, uh, pretty decent lately. So overall, um, I would say a little bit sanguine. Yeah.

Sam Azzarello: It's always good to end on a good note. (laughing) And that concludes our conversation with Michael Feroli. Be sure to stay tuned to J.P. Morgan's Making Sense to stay up to date on the latest trends and developments impacting the global economy.

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