U.S. Job Growth Much Stronger Than Expected (2024)

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Here’s what to know about the jobs report.

The continuing strength, labor market analysts say, may increase confidence among investors and the Federal Reserve that the U.S. economy has reached a healthy equilibrium in which a steady roll of commercial activity, growing employment and rising wages coexist.

It’s a remarkable change from a year ago, when top financial analysts were largely convinced that a recession was only months away.

From late 2021 to early 2023, inflation was outstripping wage gains, but that also now appears to have firmly shifted, even as wage increases cool from their peak rates of growth in 2022. Average hourly earnings for workers rose 0.3 percent in March from the previous month and were up 4.1 percent from March 2023.

Revisions to employment data in recent months showed a total uptick of 22,000 jobs.

Some analysts were worried about a trend in one of the two surveys that the government uses to track the labor market: out of step with most other data on job growth and layoffs, it showed weak hiring rates that, if correct, would have probably indicated an economy “already in recession,” according to the economic research team at Bank of America.

But even that worrying bit of outlier data improved in the latest report.

“The vanishingly few areas to criticize this labor market are melting away,” said Andrew Flowers, a labor economist at Appcast, a recruitment advertising firm.

Some have worried that as the booming labor market recovery transitioned into a slower expansion, job growth would mostly narrow to less cyclical sectors like government hiring and health care. Gains in health care — including hospitals, nursing and residential care facilities and outpatient services — led the way in this report, but job growth, for now, remains broad-based.

The private sector added 232,000 jobs overall. Construction added 39,000 jobs in March, about twice its average monthly gain in the past year. Employment in hospitality and leisure, which plunged during the pandemic, continues to bounce back and is now above its February 2020 levels.

The “continued vigor,” said Joe Davis, the global chief economist at Vanguard, has come from “household balance sheets bolstered by pandemic-related fiscal policy and a virtuous cycle where job growth, wages and consumption fuel one another.”

Data analysts note that better-than-expected gains in business productivity and work force participation have added fuel, too. Businesses large and small have had to navigate an obstacle course this decade: a pandemic, inflationary pressures and a steep rise in the cost of credit. But recently released data from the Bureau of Economic Analysis shows corporate profits have reached a record high.

Officials at the Fed, which rapidly raised interest rates in 2022 and early 2023 to combat inflation, have expressed cautious optimism that they are approaching their goals of low unemployment and more stable prices.

Inflation has fallen drastically from its peak of 7.1 percent, according to the Fed’s preferred measure. But it ticked up in February to 2.5 percent, still a half-percentage point away from the Fed’s target. And some worry that rising oil prices or geopolitical chaos could upend the delicate state of affairs.

Sal Gilbertie, the chief executive at Teucrium Trading, which covers commodities markets, said he thinks that energy prices could do a “touch higher on oil if Ukraine keeps the pressure on Russia and economic numbers remain healthy.”

Expectations for rate cuts have also come under pressure, with investors dialing down the prospect of a rate cut in June.

And while the stock index is still on course for its worst weekly performance since October, after a drop on Thursday, it remains close to its record high.

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“Our clients tell us they still can’t find qualified employees and are not willing to hire just anyone at higher wage rates, especially in areas with recent minimum wage increases and aggressive legislative changes,” said John Bradley Gibson, chief executive of Paychex.

Indeed, as Edward mentioned, companies have been talking up their “rightsizing” measures. According to S&P Global Market Intelligence this week, “Profitability mentions may be related to cost cutting measures, as talk of layoffs (and related terms) increased by 24 percent.”

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The Fed has recently welcomed strong jobs gains as labor supply picks up.

That is because strong hiring has come alongside a marked pickup in labor supply. Immigration has been much stronger than expected, and millennial men and women in particular are trickling into the labor force, enabling companies to hire without having to compete too fiercely for employees. Wage growth has been strong but not gangbusters, and inflation has cooled across a range of purchases, including those in service categories that are typically sensitive to labor costs.

Data released Friday showed that a lot of those trends persist. Hiring was very strong in March, and that wages climbed at a solid clip but continued to moderate somewhat on an annual basis. Average hourly earnings climbed by 4.1 percent last month compared to a year earlier, a tick down from 4.3 percent in February.

Overall labor force participation picked up slightly, meaning that a greater share of adults were working or looking for jobs, and employment among foreign-born workers continued to climb — a hint that immigrants may have accounted for some of the solid job increase.

The question now is how long policymakers will remain willing to tolerate such strong hiring without worrying that it will cause consumer demand, economic growth and inflation to pick back up. Job gains at the pace seen in March is faster than what most economists think is sustainable, even accounting for increasing labor supply.

But in recent speeches, central bankers have mostly signaled comfort with the vigorous labor market.

The job market is “strong but rebalancing,” Jerome H. Powell, the Fed chair, said in a speech this week. He noted that job openings had come down and that employers were reporting in surveys more ease in hiring.

A balanced but robust job market is good news for the Fed. If businesses are managing to find workers to hire, it means the economy can grow at a solid pace without overheating and generating a lot of inflation. And that means that the Fed can squeeze the economy a little bit with higher interest rates — something it is doing to wrestle inflation under control — without slamming on the brakes.

In fact, the recent surprising jump in worker supply is a big reason that the central bank might pull off a “soft landing,” in which it sets the labor market down gently and without causing a painful recession. Mr. Powell noted this week that immigration was a big reason that the economy blew through forecasters’ expectations for growth last year without generating inflation.

In fact, price increases cooled from 6.4 percent headed into the year to 3.3 percent at its conclusion, even as consumer spending consistently beat predictions.

“Our economy has been short labor, and probably still is,” Mr. Powell said, but immigration “explains what we’ve been asking ourselves, which is, ‘How can the economy have grown over 3 percent in a year where almost every outside economist was forecasting a recession?’”

Still, the current pace of jobs growth is strong even once rapid immigration is accounted for, which could keep Fed officials wary that the economy is still at risk of overheating if hiring continues at this pace.

Economists think that as immigration adds to the labor supply, job growth can remain strong without overheating the economy. A Brookings Institution analysis recently estimated that employers could add 160,000 to 200,000 jobs per month this year without a big risk of wages spiking and inflation rising. Without all of the immigration, that would have been more like 60,000 to 100,000.

And some Fed officials have already been questioning whether the central bank should cut rates at a time when inflation is proving stubborn and the economy looks like it might be heating back up.

Fed policymakers have been suggesting for months that they could soon cut borrowing costs, which are now set to about 5.3 percent. But as inflation has hit a sticking point after months of deceleration, investors have been steadily pushing back their expectation for when that might happen, and now expect the first move in only June or July.

Neel Kashkari, the president of the Federal Reserve Bank of Minneapolis, even suggested this week that if price increases get stuck, it may make sense to leave interest rates at the current high level all year. While Mr. Kashkari does not vote on policy in 2024, he does have a seat around the discussion table at rate-setting meetings.

“If we continue to see inflation moving sideways, then that would make me question whether we need to do those rate cuts at all,” Mr. Kashkari said during an interview with Pensions & Investments, noting that the economy has a “lot of momentum.”

The strength of the labor market and stubborn inflation is likely to support the Fed’s “cautious approach to monetary easing,” said Joe Gaffoglio, president of Mutual of America Capital Management.

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The other big sectors powering the gains, as has been common in recent months, were health care at 72,000 jobs and government at 71,000. Construction continued its surprising strength, adding 39,000.

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Beyond jobs, economic data continues to look rosy.

This year has started out on a similar note. Consumer spending slumped in January but roared back in February. Income growth has been strong as well. And sectors of the economy that struggled last year amid high interest rates, like manufacturing and housing, have recently shown signs of life.

A model from the Federal Reserve Bank of Atlanta estimates that overall economic output grew at a 2.5 percent annual rate in the first quarter — a slowdown from the end of 2023, but still a long way from a recession.

“We’re still plowing along,” said Sarah House, senior economist for Wells Fargo. “Things are hanging in, if not even looking a little bit firmer.”

There has been one important shift: Inflation, which eased steadily for most of last year, has looked more stubborn recently, rising faster on a month-to-month basis in January and February than in late 2023. That will probably lead the Federal Reserve to delay cutting interest rates until the summer, if not later, and has given new life to fears that inflation has not been fully tamed.

At the same time, there are hints that parts of the economy might be weaker than headline figures suggest. Consumers have been pulling back spending on discretionary items, and more borrowers have been falling behind on credit card payments and auto loans — signs that some Americans may be feeling the pinch of continued high prices and interest rates.

“You certainly have a portion of households that are really feeling these higher rates, and it’s affecting how much they can spend,” Ms. House said.

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Will A.I. boost workers’ productivity?

Rapid productivity improvement is the dream for both companies and economic policymakers. If output per hour holds steady, firms must either sacrifice profits or raise prices to pay for wage increases or investment projects. But when firms figure out how to produce more per working hour, it means that they can maintain or expand profits even as they pay or invest more. Economies experiencing productivity booms can experience rapid wage gains and quick growth without as much risk of rapid inflation.

But many economists and officials seem dubious that A.I. — especially generative A.I., which is still in its infancy — has spread enough to show up in productivity data already.

Immigration is helping to meet hiring demand, and may explain data mysteries.

The jump has come as legal migration and border apprehensions surge, and while the jump in immigration is politically contentious, the resulting pop in population is also fueling strong hiring.

Economists think that as immigration adds to the labor supply, job growth can remain strong without overheating the economy. A Brookings Institution analysis recently estimated that employers could add 160,000 to 200,000 jobs per month this year without a big risk of wages spiking and inflation rising. Without all of the immigration, that would have been more like 60,000 to 100,000.

But because immigration flows are uncertain, estimates of that “break even” employment level vary widely. Goldman Sachs puts it at 125,000, while economists at Morgan Stanley think it could be as high as 265,000.

And immigration may help to explain a recent data mystery: a big gap between two primary employment measures.

Each month, the government releases employment figures based on two surveys. The “establishment survey,” compiling data from businesses and government agencies, is used to measure overall job gains. A second measure, drawing on surveys of households and Census Bureau population estimates, is the basis for the unemployment rate and for most demographic information.

Hiring has surged in recent months in the establishment survey even as the household survey has shown it falling. Such a huge divergence is unusual, and it has left analysts scrambling to figure out which survey is giving a reliable read.

Immigration could be behind at least some of the divide. Companies typically report hiring workers of all types, including immigrants, in real time. That explains the strong job gains in the establishment survey. Census estimates, on the other hand, are likely to pick up the recent surge in immigration only with a delay.

For the household survey, “the immigration data that feed into the estimate lag by a year and a half,” Morgan Stanley economists wrote. “In contrast, we think the payroll survey is probably closer to correct.”

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How the Fed learned to stop worrying and love strong job gains.

That is because recent strong hiring has come alongside a marked pickup in labor supply. Immigration has been much stronger than expected, and millennial men and women in particular are trickling into the labor force, enabling companies to hire without having to compete too fiercely for employees. Wage growth has been strong but not gangbusters, and inflation has cooled across a range of purchases, including those in service categories that are typically sensitive to labor costs.

The job market is “strong but rebalancing,” Jerome H. Powell, the Fed chair, said in a speech this week. He noted that job openings had come down and that employers were reporting in surveys more ease in hiring.

A balanced but robust job market is good news for the Fed. If businesses are managing to find workers to hire, it means the economy can grow at a solid pace without overheating and generating a lot of inflation. And that means that the Fed can squeeze the economy a little bit with higher interest rates — something it is doing to wrestle inflation under control — without slamming on the brakes.

In fact, the surprising jump in worker supply is a big reason that the central bank might pull off a “soft landing,” in which it sets the labor market down gently and without causing a painful recession.

Mr. Powell has greeted the development as good news. He said this week that the Fed would not rule out further supply improvements, and he noted that immigration was a big reason that the economy blew through forecasters’ expectations for growth last year without generating inflation.

In fact, price increases cooled from 6.4 percent headed into the year to 3.3 percent at its conclusion, even as consumer spending consistently beat predictions.

“Our economy has been short labor, and probably still is,” Mr. Powell said, but immigration “explains what we’ve been asking ourselves, which is, ‘How can the economy have grown over 3 percent in a year where almost every outside economist was forecasting a recession?’”