Labor market remains strong

Bottom line

In the ongoing tug of war between relatively strong hard data and increasingly ugly soft data, today's March jobs report-the most important set of hard data we review each month-posted robust results across the board this morning. We expected it would be based on the solid private ADP payroll survey for March and the continued strength seen in initial weekly jobless claims.

Headline nonfarm payrolls rose by a higher-than-expected 228,000 jobs in March (consensus at 140,000, Federated Hermes at 157,000), as employers shrugged off fiscal policy uncertainty from the new Trump administration. But January and February results were collectively revised down by 48,000 jobs, which adjusts March's gain to a still-healthy 180,000 jobs, compared to gains of 117,000 jobs in February and 111,000 in January.

Similarly, private payrolls posted a stronger-than-expected gain of 209,000 jobs in March (consensus at 135,000), up sharply from downwardly revised increases of 116,000 and 79,000 in February and January, respectively. With the combined downward revision of 26,000 jobs over the previous two months, March's adjusted private payroll gain of 183,000 was still very strong.

Delayed DOGE impact Federal payrolls fell by only 4,000 jobs in March and by 11,000 workers in February, which suggests that the administration's efforts to right-size bloated federal employment levels will likely accelerate in coming months, as employees who are on paid leave or receiving severance are still counted as employed. State and local payrolls, however, added 6,000 and 17,000 jobs, respectively, in March-more than offsetting the decline in federal hiring.

Household employment and participation rate rise, wage inflation declines The devil is always in the details, and the labor-market details were pretty good in March. Household employment rose by 201,000 jobs in March, up sharply from a decline of 588,000 jobs in February, which drove the participation rate up a tick to 62.5%. At the same time, the pace of average hourly earnings declined to a softer-than-expected eight-month low of 3.8% year-over-year (y/y), which we believe was a function of a mix shift toward strong hiring in leisure & hospitality last month.

Fed on edge? Today's solid jobs report was not a market-moving event for the Federal Reserve. But in the immediate aftermath of President Trump's tariff announcement on Wednesday, the financial markets have experienced extreme volatility. Over the past fortnight, the volatility index (VIX) has nearly tripled to 45; benchmark 10-year Treasury yields have plunged from 4.36% to 3.86%; and the S&P 500 has plummeted by nearly 12% to 5,120. While we don't expect any action from the Fed at its next FOMC meeting on May 7, financial markets are now expecting as many as four quarter-point rate cuts in the back half of 2025.

Other key labor-market indicators mixed:

• ADP private payroll survey Its report for March showed an addition of a larger-than-expected gain of 155,000 jobs (consensus at 120,000), while February was revised higher from a preliminary gain of 77,000 to a final increase of 84,000 jobs. Workers who changed jobs last month saw their wages rise by 6.5% y/y, down from 6.9% in December and less than half the cycle peak of 16.1% in April 2022. Job stayers in March earned a more modest 4.6% y/y raise, in line with December but below the peak of 7.8% in September 2022.
• Initial weekly jobless claims This high-frequency leading employment indicator, which held steady at 225,000 for the March survey week that ended March 15, 2025, declined to a two-month low of 219,000 last week. Unemployment applications filed by federal employees in Washington, D.C., Maryland and Virginia have risen as the Trump administration shrinks government employment levels.
• Challenger, Gray & Christmas layoffs report Employers announced layoffs of 275,000 in March, more than double from a year ago and 60% higher than February. Not surprisingly, government downsizing accounted for 79% of the total layoffs last month.
• Job Openings & Labor Turnover Survey (JOLTS) February job openings surprisingly declined by 2.5% month-over-month (m/m) to 7.568 million, down from 7.762 million in January, and nearly 38% below a record 12.182 million job openings in March 2022. The rate of job openings dropped to 4.5% in February, down from 4.7% in January. While that's slightly higher than a four-year low of 4.4% in September, it's still well below a record 7.4% in March 2022. The ratio of available job openings for every unemployed worker held steady in February at a three-year low of 1.1, down sharply from a peak of 2.0 in March 2022.

Unemployment & participation rates rise, labor impairment rate falls Household employment (an important leading employment indicator) rebounded by 201,000 workers in March, up sharply from a decline of 588,000 workers in February, its worst monthly performance since it lost 762,000 jobs in December 2023. The unemployment rate rose a tick to 4.2%, below July 2024's three-year high of 4.3%, but still well above April 2023's 53-year low of 3.4%. The Fed expects it to reach 4.4% by year-end. The labor impairment rate slipped to 7.9% in March, down from 8.0% in February. That's its highest reading since 2021, but still well above the cycle low (dating back to 1994) of 6.6% in December 2022. The participation rate rose to 62.5% in March, up from a two-year low of 62.4% in February and just below a four-month high of 62.6% in January. That compares with a post-pandemic high of 62.8% in November 2023 and a pre-pandemic cycle high of 63.3% in February 2020.

Wage inflation mixed, hours worked rises Average hourly earnings rose by an in-line 0.3% m/m gain in March, up from a 0.2% m/m gain in February. But wages grew at a slower-than-expected 3.8% y/y pace (consensus at 4.0%) in March, down from 4.0% y/y in February. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked remained steady at 34.2 in March. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy. This is important, as employers tend to change hours before they alter their staff size.

K-shaped recovery gap narrows The rate of unemployment for highly educated workers rose to 2.6% in March, up from 2.5% in February and 2.3% in January and up from September 2022's cycle low of 1.8%. But that of less-educated workers declined to 5.8% in March, down from 6.0% in February, but still up from 5.2% in January, and well above its 31-year low of 4.4% in November 2022. The mix shift toward less skilled workers in March may have contributed to the slower pace of wage growth.

Sector details mixed:

• Temporary help (an important leading employment indicator) lost 6,000 jobs in March, after losing 10,000 in February and 8,000 jobs in January. This sector has lost jobs 33 times out of the last 35 months.
• Manufacturing added only 1,000 jobs in March, down from 8,000 in February, but much better than losses in five of the previous seven months.
• Construction added 13,000 in March on top of 14,000 in February, as the brutal winter weather has improved. The sector lost 3,000 in January. In the aftermath of last year's hurricanes and the wildfires, we still expect construction to accelerate in the spring from rebuilding.
• Retail added a strong 24,000 in March, after losing 2,000 in February, and after adding a strong 36,000 in January and 34,000 in December. After a weak start to 2025, we expect retail sales to pick up during the late Easter and Passover season.
• Leisure & hospitality hiring leapt by 43,000 jobs in March, after shedding 17,000 jobs in February and 14,000 jobs in January, likely due to bad weather. The sector had gained 47,000 in December and 54,000 in November.

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