- March was another blockbuster month for hiring, but the labor market's recovery is likely to slow soon.
- The Federal Reserve's rate hikes will cool the recovery, and the labor shortage is still raging.
- The recovery is still the fastest in modern history and smaller monthly gains won't derail the rebound.
The US hiring boom probably won't last. That's really not worth worrying about, though.
Amid historically strong inflation, various virus waves, and the global supply-chain mess, the labor market's rebound has been superlative. Data out Friday showed the economy adding 431,000 nonfarm payrolls in March, marking yet another month of extraordinary job growth. The unemployment rate fell to 3.6%, landing just 0.1 percentage point shy of the record pre-pandemic low.
It's been 25 months since the pandemic slammed the labor market, and the country has recovered 93% of its lost jobs. By comparison, it took just as much time for the job market to hit its lowest point during the Great Recession. The current recovery isn't just fast, it's unlike any seen in modern history.
Yet as the US comes close to completing its V-shaped jobs recovery, several signs point to the rebound slowing down. New headwinds stand in the way of more job creation, and while March's gain was strong, it was also the smallest one-month job increase since September. The coming months will likely show the rebound easing further, but that's probably for the best.
Rising rates are about to hit the brakes on hiring
One of the biggest hurdles now facing employers is the end of the near-zero-interest rate era seen through the pandemic. The Federal Reserve raised its benchmark interest rate on March 16 for the first time since the crisis began, kicking off a cycle of gradual rate hikes set to take place over the next few years. The increases will slowly lift borrowing costs throughout the economy, affecting everything from car loans to credit-card interest. It also means businesses will have less extra cash for personnel.
The hikes are also meant to help cool inflation. By raising borrowing costs, the Fed aims to close the gap between supply and demand and, in turn, slow the rise of prices. Weaker spending will likely leave employers in less of a rush to rehire as they settle into a period of slower economic growth and pricier borrowing.
That's essentially what the central bank is planning for, according to Fed chair Jerome Powell. The chair described the labor market as "tight to an unhealthy level" earlier in March, citing the unprecedented imbalance between job openings and available workers. Data published Tuesday backed him up. The US boasted just 0.6 available workers for every opening in February, according to the Job Openings and Labor Turnover Survey. That extended the record-low reading that first showed up in December.
Removing the Fed's support and cooling inflation will be key to keeping the labor market recovery alive, Powell said, adding the economy is healthy enough to deal with higher interest rates.
"We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability," he said.
Millions of workers are still waiting on the sidelines
A simple workforce dynamic is also set to slow the labor market's recovery: as more people take jobs, fewer workers are available to fill the remaining openings.
That's been the driving force behind the labor shortage that emerged in 2021 and lingers today. Job openings remain near record highs, yet companies still report difficulties in finding people to hire.
The workers exist, but they aren't in any rush to find a job. The labor force participation rate — which tracks the share of Americans who are either working or looking for work — has had a much more lackluster recovery than overall payrolls or the unemployment rate. The measure rose just 0.1 percentage point in March to 62.4%, well below the pre-pandemic high of 63.4%.
The rate's slow rebound signals millions of Americans are still waiting to rejoin the workforce. Potential reasons for the holdup are plentiful. Though virus infections have fallen dramatically since the Omicron wave, the pandemic is still ongoing and likely keeping many Americans from seeking jobs. Childcare costs could be keeping parents at home and away from work as well. Some workers might simply be waiting for higher pay or better working conditions before rejoining the labor force.
Participation is climbing, signaling employers won't be stuck with the labor shortage forever. Still, without a sharper upswing, the lack of a large pool of job seekers suggest it'll be harder to add jobs in the months ahead. Couple that with the Fed's policy path and expectations for slower economic growth, and it's clear that the massive job gains seen just months ago aren't likely to repeat themselves.
"Any one of those factors could be enough to slow down the labor market, but it's just a question of how they will play out," Daniel Zhao, senior economist at Glassdoor, told Insider's Juliana Kaplan in an interview."At the very least, today's report gives us some confidence that there is some buffer for the labor market to help fight against any headwinds that we might encounter."