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Thoughts From Last Week
Despite expectations for a slowdown, the April Jobs report showed better-than-expected payroll gains, a decrease in unemployment and an uptick in wage growth.
Last week, the Federal Reserve delivered what many expect to be the last rate hike of this cycle, bringing the federal funds rate to a range of 5.00-5.25%. With the Fed now potentially on pause, at least for a while, investors are shifting their focus away from the risk of further Fed tightening and towards the risk of recession, as the fallout from the regional banking crisis casts a shadow on the economic outlook. Recent data have shown a loss of economic momentum, with declining job openings, tightening lending conditions and surveys indicating lower business spending and hiring plans. Yet, despite expectations for a slowdown, the April Jobs report showed better-than-expected payroll gains, a decrease in unemployment and an uptick in wage growth. The report overall was strong, though large downward revisions to the prior two months added a layer of softness to the recent trend. Still, while layoff announcements and unemployment claims have been rising in recent months, excess demand for workers has seemingly been enough to absorb those layoffs so far and keep unemployment at bay.
Wage growth continues to be too high for the Fed’s comfort, but while wages may have bounced last month, compared to a year ago they are still steadily declining, as shown in the chart. Moreover, as the worsening economic outlook induces businesses to cut back on spending and hold off on hiring plans, it’s difficult to imagine wage growth can increase sustainably from here. Because of this, and the expected toll that credit tightening will have on growth in the coming months, we still expect the Fed to stay on pause in June and potentially pivot to easing monetary policy in response to recession later this year.
Source: BLS, J.P. Morgan Asset Management.