WRAPUP 1-Moderate slowdown in US job, wage growth expected in March

U.S. job growth likely slowed moderately in March, while wage gains remained elevated, suggesting the economy ended the first quarter on solid ground and potentially delaying anticipated interest rate cuts from the Federal Reserve this year. The Labor Department's closely watched employment report on Friday is also expected to show the unemployment rate remaining below 4% for 26 straight months, the longest such stretch since the late 1960s.

U.S. job growth likely slowed moderately in March, while wage gains remained elevated, suggesting the economy ended the first quarter on solid ground and potentially delaying anticipated interest rate cuts from the Federal Reserve this year.

The Labor Department's closely watched employment report on Friday is also expected to show the unemployment rate remaining below 4% for 26 straight months, the longest such stretch since the late 1960s. The economy is outperforming its global peers, despite 525 basis points worth of rate hikes from the U.S. central bank since March 2022 to quell inflation. Economists say most businesses locked in lower borrowing costs prior to the Fed's tightening cycle, giving them some insulation from higher rates and allowing them to keep their workers. Household balance sheets are mostly healthy, helping to support consumer spending. The labor market has also benefited from a rise in immigration over the past year.

"The labor market is still quite tight, but it also looks like it's loosening," said David Page, head of macro research at AXA Investment Managers in London. "We are used to the labor market loosening by demand falling and people losing their jobs. Thankfully, this time around that's not what's happening." Nonfarm payrolls likely increased by 200,000 jobs last month after rising 275,000 in February, economists said in a Reuters survey. Estimates ranged from 150,000 to 250,000.

Easing financial conditions are boosting hiring in interest rate-sensitive industries like construction, where payrolls surged in February. Employment in sectors such as healthcare, leisure and hospitality as well as state and local government remain below pre-pandemic trends. Economists expected these sectors to continue hiring, providing a base for job growth even as payroll gains are expected to slow. The National Federation of Independent Business' measure of small businesses planning to add jobs over the next three months fell in March to the lowest level since May 2020. It is seen as a good predictor of payroll gains.

"The other thing that's happened is that as financial conditions have eased, we have seen more interest-sensitive sectors, such as construction, start to pick up again," said Dean Maki, chief economist at Point72 Asset Management in Stamford, Connecticut. "The biggest negative effect of the rate hikes on the labor market has already occurred. What's happening now is the easing of financial conditions is leading to better job growth in many sectors."

Financial markets expect the Fed will start easing rates in June. Fed Chair Jerome Powell, however, reiterated on Wednesday the central bank was in no rush to cut after leaving its policy rate unchanged in the current 5.25%-5.50% range last month. Average hourly earnings are forecast to have risen 0.3% in March after gaining 0.1% in February as some weather-related distortions fade. The annual increase in wages likely slowed to an estimated 4.1% in March from 4.3% in February, economists said. Wage growth in the 3.0% to 3.5% range is seen as consistent with the Fed's 2% inflation target. Inflation by most measures is running above target.

A TALE OF TWO SURVEYS Payroll strength has not been replicated in the smaller and volatile household survey, from which the unemployment rate is derived. The unemployment rate is forecast unchanged at 3.9% in March. Household employment has been very weak in recent months, a trend that economists expect continued in March.

They are, however, not concerned as the weakness reflects increased labor supply through immigration. The Congressional Budget Office recently upgraded its immigration estimate for 2023 to 3.3 million from 1.0 million. These immigration flows were likely not incorporated in the employment report as the Labor Department's Bureau of Labor Statistics, which compiles the employment report, uses Census population estimates.

They are likely to be reflected when the bureau makes its annual benchmark revision next year. "That causes something of a problem in terms of the aggregation of the household survey," said AXA Investment Managers' Page. "That's why the household survey numbers come in a little bit softer."

Researchers at the Brookings Institution in Washington estimated that the new CBO projections suggested the labor market in 2023 could accommodate employment growth of 160,000 to 230,000, compared to previous projections of 60,000 to 130,000, without adding pressure to wages and price inflation. Economists said this could allow the Fed to let the economy to run a little stronger before cutting rates.

"The establishment survey may provide a more accurate read of job growth if net migration numbers are closer to those estimated by the CBO than the Census," said Nancy Vanden Houten, lead U.S. economist at Oxford Economics in New York. "This would help explain why ... monthly job growth figures may not need to slow as much as previously estimated to be noninflationary."

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