The latest U.S. data from the Bureau of Labor Statistics (BLS) showed a job market that was slowing but still exhibiting historic strength. In thinking about what this likely means for monetary policy, the level should matter more than the trend.

In Focus - Cooling but Still Hot

Last week’s BLS March jobs report showed a very strong U.S. labor market.
The unemployment rate fell from 3.6% to 3.5%. There were 236K new jobs. For those who enjoy data deep cuts, the prime-age employment-population ratio rose to 80.7%, its highest level since May 2001. And average hourly earnings were up 4.2% over the previous 12 months.

There is an alternative interpretation of the same numbers: the labor market is cooling. In this reading, those 236K new jobs were not only below expectations but below the 334K average monthly gains over the last six months. Plus, the average hourly earnings figure is down from its 5.9% increase over the year to March 2022.

Which interpretation is right? They both are. But it’s the former, ‘excessively hot’ interpretation that matters more right now.

Here’s the chain of reasoning. For businesses and others, it’s important to know whether the economy is heading toward a recession. A key determinant of whether that will happen is monetary policy. Tightening can impact the economy directly (higher interest rates pass through to mortgage rates and slow home buying, for example) or indirectly (e.g. higher interest rates roil the banking sector, which reduces loan availability). All of which mean we’re interested in the variables that are likely to have the most impact on Fed decisions.

The Fed is legally-required to focus on two goals: full employment and price stability. The former is addressed directly by the jobs report – 3.5% unemployment would meet most anyone’s definition of full employment. The latter, inflation, is also connected to the jobs report, as there is a common economic belief that an excessively tight labor market will push up wages and, in turn, broader price inflation (this is known as a “Phillips Curve” argument).

How does this help us pick between the “too tight” and “getting better” arguments? Because each of these considerations depended on levels, not trends. If the economy is on the far side of the threshold for concern, it’s still a concern, even if it’s moderating.

The chart illustrates the point with two different takes on labor market tightness, incorporating data from the BLS Job Openings and Labor Turnover Survey, or JOLTS also released last week. The dark line (left scale) shows the rate at which American workers are quitting their jobs. Higher quits are generally taken as an indicator of labor market strength– people quit their jobs when they’re fairly confident they can find something else.
The red line (right scale) gives the ratio of job openings per unemployed person. Here ‘up’ also indicates labor market strength, and it’s notable how the two series parallel each other fairly closely, even over more than two decades.

The JOLTS data only run through February, yet one can see the dueling interpretations on display: both series are receding from recent highs, but the latest values exceed any pre-Covid numbers since the series began in December 2000.

For policymakers, it is likely to be the historic strength that matters, not the minor moderation. This report is likely to be taken as a sign for the Fed to press on with tightening.

You can now receive the Weekly Economic Report straight to your inbox every Monday by signing up here.

Latest Flexport Metrics & Research

From last week: In Focus - Trade Finance: Ill Winds Blowing?. We look at headwinds in trade finance.

Economic Developments

In its latest Global Trade Outlook the WTO revised its forecast for trade growth in 2023 (in volume terms) upward to 1.6% year-on-year from the previous forecast of 1.0% issued last October, citing improving prospects for global growth and increased consumer spending power as a result of declining commodity prices. The report notes that this would still be under the average annual growth in trade of 2.6% from 2010 onwards.

The head of the IMF, however, sounded warnings about the state of the global economy ahead of the annual IMF / World Bank Spring meetings in Washington next week. She noted that the Fund’s current forecast is for 90% of advanced economies to see growth rates slow this year, including the U.S. and the Euro area. It now projects real global growth to average only 3% over the next five years, its weakest forecast since the early 1990s.

U.S. real goods imports in February were down 1.5%, or $4.0 billion, from January to $262.2 billion. By end-use category, consumer goods and automotive imports, including parts, fell by 5.7% and 7.7% respectively. The biggest drop in consumer goods was in the ‘cell phones and other household goods’ sub-category, which decreased by $1.5 billion. Real goods exports were off 4.1%, or $6.7 billion, from the previous month to $155.6 billion.

The household savings rate in the Euro area rose in Q4 2022 after six consecutive quarters of decline, rising to 14.1% on a seasonally-adjusted basis. The increase was driven by a greater increase in gross personal income (+2.2%) than in consumption (+1.3%).

German exports rose 4.0% month-on-month in February on a calendar and seasonally-adjusted basis to reach €136.7 billion, a new monthly record. Exports to the U.S. were up 9.4% to €14.0 billion and up 10.5% to €8.5 billion to China. Exports to Euro area countries increased 1.6% to €52.5 billion. Imports were up 4.6% month-on-month to €120.7 billion.

Industrial production in Germany increased 2.0% month-on-month in February, far above the consensus forecast for little to no change. Production of motor vehicles and parts, the country’s largest industrial sector, expanded by 7.6%.

Political Developments

Ueda Kazuo began his first term as the new governor of the Bank of Japan on Sunday, U.S. time, replacing Kuroda Haruhiko, who served two five-year terms. Ueda’s first policy meeting will be held on April 27- 28.

Trade ministers from the G7 met virtually to discuss a range of issues, including WTO reforms, export controls, and supply chains, particularly supply chains for critical minerals, a pressing topic at the moment as the U.S. moves ahead on separate deals with Japan and the EU. The joint statement also included language referring to export controls as a ‘fundamental policy tool,’ the first time it has been referred to as such in the G7 context.

Export controls were reaffirmed as a ‘fundamental policy tool’ in the joint statement released by the G7 trade ministers following their virtual meeting last week, hosted by Japan, this year’s G7 president. The U.S., Japan and the Netherlands have in recent months all announced restrictions on exports related to the production of advanced semiconductors.

Disclaimer: The contents of this report are made available for informational purposes only and should not be relied upon for any legal, business, or financial decisions. Flexport does not guarantee, represent, or warrant any of the contents of this report because they are based on our current beliefs, expectations, and assumptions, about which there can be no assurance due to various anticipated and unanticipated events that may occur. This report has been prepared to the best of our knowledge and research; however, the information presented herein may not reflect the most current regulatory or industry developments. Neither Flexport nor its advisors or affiliates shall be liable for any losses that arise in any way due to the reliance on the contents contained in this report.