No Bad News Means No Fed Ease in Sight
There were no big surprises in the March jobs data, and that will support Fed policy makers’ view that steady to slightly higher rates are appropriate over the next two years. Job gains rebounded after a soft month in February. The unemployment rate held steady at a very low 3.8%, matching the average for the past six months. Average hourly earnings growth did not continue to accelerate in March, but remained at a reasonable 3.2% y/y. That is a picture of a healthy labor market, and ought to erase any concerns raised by the small job gain in February.
Though hiring tends to lag overall economic performance, we think there are important implications right now from the pace of hiring. That is because household demand has been the main driver of growth in this expansion, and job gains have been the main driver of household demand growth. Recent hiring data have been volatile, but the hiring trend is still positive for household spending.
Consumer Demand Set to Pick Up
That is important because, like many other economic data series, there has been a cooling in retail sales and in real consumption spending in recent months, despite lower oil prices which helped boost real income. The recent recovery in oil prices will put a bit of downward pressure on real disposable income, but we expect healthy job gains to offset that effect. We anticipate a re-acceleration in household spending.
Fed Quietly Campaigning for a Less Dovish Market View
Money markets are pricing in modest odds of a rate cut as the next Fed move, but Fed policy makers are not that dovish. Fed officials who have spoken recently, including Cleveland Fed President Loretta Mester and Philadelphia Fed President Patrick Harker, have discussed the likelihood of more rate hikes and of steady rates, but not rate cuts. As long as the labor market continues to perform as it did in March, and as it has been on trend, Fed policy makers are likely to continue their quiet campaign to adjust market rate expectations upward.