US labor market is quickly tightening; unemployment rate drops to 3.6%

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  • Nonfarm payrolls up 431,000 in March
  • February wage earnings revised to 750,000 from 678,000
  • Unemployment rate drops from 3.8% to 3.6%
  • Average hourly wage increases by 0.4%; an increase of 5.6% year-on-year
  • Employment in some sectors now above pre-pandemic levels

WASHINGTON, April 1 (Reuters) – US job growth continued at a brisk pace in March, with the unemployment rate falling to a new two-year low of 3.6% and wages accelerating again, positioning the Federal Reserve to support interest rates with a hefty 50 basis points in May.

The Labor Department’s closely monitored employment report on Friday also found that employment in professional and business services, financial activities and retail was now above pre-pandemic levels. It underlined solid dynamism in the economy as it faces headwinds from inflation, tighter monetary policy and Russia’s war on Ukraine, which is putting further strain on global supply chains and increasing price pressures.

The Fed raised its key rate by 25 basis points last month, its first hike in more than three years. Policymakers have stepped up their aggressive rhetoric, with Fed Chair Jerome Powell saying the US central bank must act “quickly” to raise interest rates and possibly “more aggressively” to prevent high inflation from becoming entrenched.

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“The Fed is focused on the unemployment rate,” said Chris Low, chief economist at FHN Financial in New York. “Brace for more aggressive tightening rhetoric.”

The survey of establishments found that nonfarm payrolls rose by 431,000 jobs last month. The February data was revised higher to show 750,000 jobs added instead of the previously reported 678,000. Total employment is now 1.6 million jobs below pre-pandemic levels.

Economists consulted by Reuters had predicted payrolls would rise by 490,000. Estimates ranged from as low as 200,000 to as high as 700,000.

Demand for staff is driven by a sharp decline in the number of COVID-19 infections, which has led to restrictions being lifted across the country. There are no signs yet that the war between Russia and Ukraine, which has pushed gasoline prices above $4 a gallon, has had an impact on the labor market.

The broad rise in payrolls was led by the leisure and hospitality industry, which created 112,000 jobs. Professional and business services payrolls increased by 102,000 jobs. Employment in the sector is now 723,000 jobs higher than before the pandemic. Retailers added 49,000, leaving employment 278,000 higher than in February 2020.

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Employment in financial activities grew by 16,000 and is now 41,000 above pre-pandemic levels. Manufacturing payrolls are up 38,000 jobs and have yet to make up for all the jobs lost during the pandemic. Construction employment is now back to pre-pandemic levels, with 19,000 jobs created in March.

With a near-record 11.3 million job openings as of the last day of February, payroll growth is likely to remain solid this year. The labor pool continued to grow steadily in March.

The household survey, from which the unemployment rate is derived, showed 418,000 to have entered the workforce last month. That was more than offset by an increase of 736,000 jobs in households. As a result, the unemployment rate fell two-tenths of a percentage point to 3.6%, the lowest level since February 2020.

The employment rate, or the proportion of working-age Americans in employment or seeking employment, rose from 62.3% to 62.4% in February.

With still few employees, the average hourly wage is up 0.4%, after a 0.1% increase in February. As a result, the annual increase rose from 5.2% in February to 5.6%.

The employment report further allayed fears of a recession in financial markets following slight inversions in the widely followed two- and 10-year US Treasury yield curves this week.

Economists said the Fed’s huge holdings of government bonds and mortgage-backed securities made it difficult to get a clear signal of yield curve movements. Some noted that real yields remained negative, while others argued that the two- and five-year yield curves were a better indicator of a future recession. This segment is not reversed.

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Reporting by Lucia Mutikani; Editing by Chizu Nomiyama and Andrea Ricci

Our Standards: The Thomson Reuters Trust Principles.

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