Slowdown in Hiring May Signal Upcoming Interest Rate Cuts

U.S. employers adding fewer jobs than expected in April,  along with lower wage gains, indicate that interest rates may start to come down this year.

Payrolls grew by 175,000 in April and the unemployment rate ticked up to 3.9 percent, according to the U.S. Bureau of Labor Statistics. Monthly job gains have averaged 242,000 over the past 12 months.

In addition, average hourly wages rose 0.2 percent from March—a sign of deceleration, boosting hopes that the Federal Reserve may start trimming interest rates from their two-decade high.

“Taken together with an uptick in unemployment and slightly falling wage growth, the unexpectedly low payroll increase suggests that the labor market may be loosening,” said Justin Ladner, senior labor economist at SHRM. “However, we do not yet have sufficient evidence of a trend in this direction, and the overall health of the labor market remains strong.”

The big picture is one of a steady labor market with disinflationary growth, said Julia Pollak, chief economist at ZipRecruiter. “After what looked like a reacceleration in the first quarter of 2024, [the May 3] report shows the labor market returning to its prior trend of gradually slowing growth. Instead of stagflation, the report shows solid payroll gains and cooling wage growth—exactly the news markets and the Fed were hoping for.”

Sam Kuhn, economist at Appcast, noted that April’s report “is by no means weak—gains were still strong, the unemployment rate increased just slightly, and labor force participation picked up for prime-aged workers. The gap between supply and demand continues to narrow.”

The labor market remains resilient, he added.

“We’re at a point where the U.S. labor market has reached a relatively steady state, and we will likely not see huge growth numbers in upcoming jobs reports,” said Amy Glaser, senior vice president at Adecco. “As activity in some sectors settles down and the economy stabilizes more, near-term job growth will likely occur in industries most impacted by warmer weather—for instance, the travel, hospitality and leisure spaces—as more people plan their journeys for vacations, graduations and other events.”

Ladner tamped down expectations of interest rate cuts, saying that the April jobs report will not in and of itself motivate the Federal Reserve to lower rates. “The Fed will not respond sharply to a single jobs report, especially since job growth remains healthy and inflation is still well above the Fed’s target,” he said. “However, if subsequent evidence does indicate an economic slowdown, then the Fed may revisit this position sooner than expected.”

Industry Breakdown

Health care employers once again led job creation, adding 56,000 new jobs in April. Employment growth was reported in ambulatory health care services (33,000), hospitals (14,000), and nursing and residential care facilities (9,000).

Other sectors showing significant job growth included social assistance (31,000), transportation and warehousing (22,000), and retail (20,000). Construction added 9,000 positions while government, which had shown solid gains in recent months, was up just 8,000 after averaging 55,000 over the previous 12 months.

“The usually strong construction and government sectors wobbled slightly,” Kuhn said. “Leisure and hospitality and professional and business services, other dependably strong sectors, also stumbled, with business services shedding 4,000 and leisure adding 5,000.”

Ger Doyle, ManpowerGroup senior vice president and head of Experis North America, one of the largest recruiters of tech talent in the U.S., said AI safety and compliance roles have experienced a notable uptick since last summer. “Employers are also raising expectations around IT skill sets for executives and legal functions, and AI/machine learning engineers are now expected to showcase a blend of technical and soft skills to remain competitive in the job market.”

Unemployment Edges Up

The unemployment rate rose to its highest level since January 2022. It has remained in a narrow range of 3.7 percent to 3.9 percent since August 2023.

A more encompassing rate that includes discouraged workers and those holding part-time jobs for economic reasons also ticked up, to 7.4 percent, its highest level since November 2021. The labor force participation rate, or those actively looking for work, was unchanged at 62.7 percent.

“The employment to population ratio for workers aged 25-54 rose to 80.8 percent, with the rate for women hitting a new all-time high of 75.5 percent,” Pollak said. “The increased participation of women, including mothers, is likely a major driver of recent gains in voluntary part-time employment.”

Wages Cool

Average hourly earnings in April rose from March by 7 cents to $34.75. Over the past 12 months, average hourly earnings have increased by 3.9 percent, an encouraging sign for inflation.

“Wage growth continues its deceleration pattern,” Kuhn said. “The Federal Reserve is closely watching for signs of wage growth to potentially reignite in a similar pattern as inflation in Q1. However, such a resurgence has yet to materialize, partly due to less job-switching by workers, a factor that drove much of the wage growth observed in 2021 and 2022.”