Unemployment Remains Very Low at 3.6%

• Employment increased by 428,000 jobs in April, with small downward revisions to job growth in February and March. Employment remains about 1.2 million below its pre-pandemic level.
• The unemployment rate held steady at 3.6% in April, slightly above its pre-pandemic level. Both employment and the labor force contracted over the month in a survey of households.
• The labor market remains solid, although job growth has slowed somewhat in recent months as a limited supply of labor is constraining hiring.
• PNC expects job growth to slow over the course of 2022 as higher interest rates restrain economic growth. Employment will return to its pre-pandemic level later this year.
• The unemployment rate will hit a multi-decades low later in 2022.

The US labor market added 428,000 jobs in April, another strong month of employment gains, according to a survey of employers from the Bureau of Labor Statistics. There were small downward revisions to job growth in February (to 714,000 from 750,000), and March (to 428,000 from 431,000) of a combined 39,000. The three-month moving average of job growth through April was 523,000, down slightly from 549,000 in March. The private sector added 406,000 jobs in April, while government employment rose by 22,000.                      

Employment in April was down by 1.2 million, or 0.8%, from its all-time high in February 2020. In March and April 2020 employment fell by a combined 22 million, or 14%, as the pandemic came to the United States.

The unemployment rate held steady at 3.6% in April from March. The unemployment rate was 3.5% in early 2020 before the pandemic, at a 50-year low. It then soared to 14.7% in April 2020 with the pandemic, and since then has fallen steadily.

Employment in a survey of households (different from the survey of employers) fell by 353,000 in April, the first drop in household employment since April 2020, when the pandemic was ravaging the labor market. The labor force (number of people working or looking for work) fell by 363,000 in April, the first decline since September 2021.

The labor force participation rate—the share of adults working or looking for work—fell to 62.2% in April from 62.4% in February. This was the first decline in the labor force participation rate since March 2021. The labor force participation rate was above 63% in early 2020, so it has not fully recovered from the pandemic, but at least until April had been rising steadily over the previous year. Although the participation rate has not fully recovered from the pandemic, the labor force itself in April was down by only 500,000 from early 2020.

Employment rose in goods-producing industries by a solid 66,000 in April, with a big gain of 55,000 in manufacturing, but an increase of only 2,000 in construction. Employment in private service-providing industries rose by 340,000. This included gains of 104,000 in trade, transportation and utilities; 78,000 in leisure/hospitality services; 59,000 in education/health services; and 41,000 in business/professional services.

Average hourly earnings rose by 0.3% in April from March, and average wage growth in March was revised higher to 0.5% from 0.4%. The tight labor market is giving workers more power and is leading employers to increase wages. Average hourly earnings are up 5.5% over the past year, although this is running below the pace of inflation. The average workweek held steady in April from March at 34.6 hours. With more jobs, higher wages, and the same workweek, total labor market income increased 0.6% in April. With energy prices down over the month, real earnings likely increased in April from March.

The April jobs report was another solid one, although the 3-month average of job growth has slowed from above 600,000 in late 2021 to around 520,000 this year. Demand for labor remains very strong; the problem is a shortage of available workers, and the decline in the labor force participation rate in April could add to wage pressures.

The Federal Open Market Committee raised the federal funds rate by 0.5 percentage point at its meeting earlier this week. With inflation far above the FOMC’s 2% objective, the committee is working to increasing borrowing costs in an effort to cool off economic growth and the labor market in particular. PNC expects the FOMC to continue to increase the fed funds rate through 2022 and into 2023, increasing borrowing costs. There will likely be another 50 basis point hike at the FOMC’s next meeting, in mid-June, with the rate set to end this year at above 2% and end next year close to 3%. This would be above the neutral rate; that is, at that level, the fed funds rate would be restraining economic growth.

Higher interest rates throughout the economy will eventually lead to slower job growth and a cooling-off in the labor market. But the FOMC has a difficult task ahead. Their hope is to raise interest rates by enough to slow economic growth and reduce inflationary pressures, but not by so much as to cause a recession—an outright contraction in the U.S. economy. That task has only gotten more difficult with the Russian invasion of Ukraine, which has added to U.S. inflation but is also likely to weigh on U.S. growth, through higher energy prices and a weaker European economy.

The most likely outcome over the next couple of years is still expansion, albeit weaker in 2023 and then again in 2024. But the risks of a Fed misstep have increased, and it may even be that the only way the central bank can slow inflation is to engineer a (hopefully) mild recession.

With current solid fundamentals, in particular, the very strong labor market, if a recession does come it would likely not be until 2023 or even 2024. The probability of recession over the next couple of years is around 30%, up from around 15% before the invasion of Ukraine.

PNC expects a further slowing in job growth this year, with average monthly gains of around 300,000 through the rest of 2022. Employment is set to recover to its pre-pandemic level in the third quarter. The unemployment rate will fall further in the next few months to below the pre-pandemic rate of 3.5%, to a new five-decades-long low.

The PNC Financial Services Group, Inc. is one of the largest diversified financial services institutions in the United States, organized around its customers and communities for strong relationships and local delivery of retail and business banking including a full range of lending products; specialized services for corporations and government entities, including corporate banking, real estate finance and asset-based lending; wealth management and asset management. For information about PNC, visit www.pnc.com.