Jobs Outperform,Setting Stage for More Monetary Tightening

By Dr. Michel Léonard, Chief Economist and Data Scientist, and Riley Conlon, Research Analyst, Triple-I

U.S. employment remains more resilient than expected given monetary tightening, adding 253,000 jobs in April, and pushing the unemployment down to 3.4 percent in April compared to 3.5 percent in March.

Jobs growth has been positive for the last 26 months, with the U.S. economy now having replaced most of the jobs lost at the beginning of the pandemic. Employment for the Insurance Carriers and Related Activities subsector specifically continues to outperform wider U.S. employment. The unemployment rate for the insurance industry was 1.6 percent in April, up from 1.5 percent in March.

Employment’s resilience and the historically low current unemployment rate are likely to add to pressure from inflation hawks on the Fed to not only continue increasing rates but to make each rate hike bigger.  Based on Triple-I’s model, the spread between actual employment and the pre-COVID forward trend, which has been narrowing since the end of the pandemic, is likely to stabilize at its current level.

Aligned with this forecast and our conversations with policy makers, our view is that it is unlikely that the stronger-than-expected April jobs performance will lead the Fed to aggressively accelerate the pace of current monetary tightening; it may, however, expand the duration of the current tightening cycle.

U.S. employment has been steadily heading back to its pre-COVID growth trend. This shows great resilience, given monetary tightening. Expect the Fed to continue with “Slow and steady wins the race,” even though calls for “Monetary shock and awe” will likely grow stronger.