Tempering Job Creation May Herald Less Inflation and Interest Rate Pressure Ahead
Employers continuing to hire, but at tapering pace. The economy welcomed 236,000 new positions in March, the slowest month for job creation since a net loss in December 2020. Hiring was led by the leisure and hospitality sector, along with additions in health care, the public sector, and professional and business services. These gains offset job losses in retail trade, construction and manufacturing. Overall, while last month’s hiring is well above the long-term average, it falls short of recent benchmarks and aligns with other indicators of a strong, but softening labor market.
Signs of slackening labor demand are gathering. While the unemployment rate dipped by 10 basis points last month to 3.5 percent, the modest decline was mainly driven by fewer people voluntarily entering the unemployment pool. This includes individuals choosing to leave positions or entering/re-entering the labor force. The number of people temporarily laid off or losing permanent positions increased in March. Globally, the first few months of 2023 have seen the most announced layoffs since the beginning of 2009, with Amazon, Meta, and Microsoft leading the way in the U.S. National job openings also declined by 632,000 in February to 9.9 million in the most recent available data. Taken together, these indicators suggest loosening job market conditions with implications for the overall economy.
Cooling wage growth and inflation factor into Fed policy. A softening of labor demand is helping to moderate year-over-year wage growth, which fell to 4.2 percent in March, the lowest in 21 months. This is favorable for inflation, which is also on a moderating trajectory. The core personal consumption expenditures index, the Federal Reserve's preferred inflation gauge, eased to a year-over-year increase of 4.6 percent, matching December 2022 for the slowest rise since October 2021. However, core PCE inflation remains more than double the Fed's 2 percent target, highlighting market expectations of a 25-basis-point hike in the overnight lending rate in May. The Fed has implied through commentary and its own dot plot that subsequent rate increases are less certain.
Easing inflation is positive for the multifamily sector. A slowdown in the pace of price increases would benefit consumer sentiment and housing demand. An improved economic outlook can boost confidence for major financial decisions, such as forming a new household. Although consumer sentiment dipped in March, it has been generally trending upward since summer 2022. This shift may already have a positive effect on housing demand, as preliminary data shows apartment absorption returned to positive territory in the first quarter after being negative for most of last year.
The investment sales outlook is improving. Market participants currently anticipate that the Fed's next rate hike will be the last of the current cycle. Interest rate stability would enable commercial property investors to better adapt to the higher capital cost environment. While many lenders remain cautious following recent banking disruptions, as more buyers and sellers align on terms, transaction activity is expected to increase. Positive sales momentum is anticipated to build in the second half of the year.