The Labor Department published the March employment report on Friday, and arguably this was the best jobs report we've seen since the pandemic's onset. No, it wasn't the largest total employment gain, but the details within this report show more fundamental strength and support the notion that a robust recovery is underway.
Headline Job Gains Strongest Since August
The U.S. economy added 916,000 jobs in March, beating estimates by 250,000. On top of that there were 156,000 in upward revisions. Obviously all of that is great news.
The largest job gains came from some of the hardest hit industries. The sum of Entertainment/Recreation, Accommodation, and Food Services, which I've been calling the "lockdown" sectors, added 280,000 jobs, for a 2.1% gain. That's on top of gaining nearly 400,000 last month.
Education also boomed. Private education employment was up 1.9% in March, presumably as private universities started relaxing restrictions. State and Local government employment 130,000 jobs, which were entirely concentrated in public education.
Catch-Up vs. Ongoing Hiring
The economy is basically on two-tracks right now. The first is catch-up employment, mostly in those lockdown sectors. Even after the huge gains in recent months, headcount in the lockdown sectors is still 19% below pre-pandemic levels. The rest of the economy is only 3.7% below peak. Obviously this catch-up employment is very important both economically and for the well-being of the individuals regaining employment.
However, in terms of doing economic analysis, employment gains in the rest of the economy are perhaps more telling. We know that restaurants and hotels will be re-hiring a ton of people in the coming months as a tsunami of post-vax demand hits those sectors. Hence, actually seeing huge employment gains in those sectors is nice, but also quite expected.
I've been arguing that in order for there to be persistent inflation, the jobs market probably needs to get to 2018-levels of tightness. That requires more than just restaurants to fill up again. It requires all sorts of companies adding to payrolls. In turn that requires all sorts of companies expecting strong demand for their products. In other words, we need to see a feedback loop of business optimism driving robust hiring which subsequently fuels wage growth.
On this measure, it was a great March. All non-lockdown private sectors added 501,000 jobs, or about 0.5%. This is why I'd argue this was the strongest employment report in the COVID period. Sure the summer of 2020 payrolls had larger absolute gains, but that was merely a rebound from astounding losses in the first few months of the pandemic. This report suggests a very robust post-pandemic hiring environment.
Of course the usual caveats apply. This is just one month, and it wouldn't be reasonable to expect +900,000/mo. jobs to persist month after month. However, I do think it is realistic that the lockdown sectors can get back to pre-COVID employment levels in this calendar year.
It is also the case that the non-lockdown sectors are very unlikely to keep adding at a 500,000/mo. pace. Still, even the fact that a single month showed this much strength clearly reflects a high degree of business confidence, which is a great sign for the rest of 2021.
How Long Until the Labor Market Gets 'Tight'?
As I mentioned above, the most important question is how close we are to "full" employment. That's when we'll start seeing real wage pressure. It is also our best guess as to when the economy might experience persistent inflation pressure, not just pandemic-related supply chain issues.
In February, I published a chart with my estimate for a realistic time frame to full employment. Remember, the headline unemployment rate is only part of the equation. We probably won't see 2018-level inflation pressure until both the unemployment rate is low and labor force participation recovers. Many economists use the employment/population ratio as a combined measure of both employment and participation in the labor force.
Below is my original chart. (Click on the link for details as to the methodology)
Source: Bureau of Labor Statistics; Brown Advisory calculations
My original guess was that the unemployment rate wouldn't hit 2018 levels until the end of 2023, with the employment/population ratio reaching that level in the third quarter of 2023. Now, with two employment reports since I did the chart, total employment has lagged my model by 204,000. However, labor force growth has lagged by even more (482,000). As a result, unemployment has done slightly better than my simple projection, but employment/population is slightly worse.
Net-net, I haven't changed my mind about how far away we are from full employment. I don't think it is terribly realistic that employment recovers to 2018 levels until late 2023. If that's right, there is no chance the Fed is hiking before 2024.
The stock market was closed on Friday and bond market participation was very light. So we should be careful drawing too big of a conclusion from such a thin market. But for what it's worth, bond yields did jump higher, although the pain was most acute in the 3-5 year part of the curve. This is the most definitive sign yet that the persistent steepener trade is over.
From September through February rising yields were entirely about higher inflation expectations. I wrote last week in my piece about TIPS that it wasn't logical that inflation expectations could keep rising forever. If the markets are going to price in more and more economic growth, they'd have to start pricing in Fed rate hikes. That's what's happening now.
On Friday alone markets added half a rate hike to 2023. Look for the 3-7 year part of the curve to be the focal point of any more yield increases, with real yields being the driving force.
I still like shorting TIPS.