What’s the Outlook for the Job Market?

The job market outlook is changing rapidly as we advance through 2024. The recently released April Jobs report was a disappointment, showing that the number of new jobs created declined relative to Q1 2024. A tight supply helped support the job market early on in the interest rate cycle, but now the economy is really beginning to feel the effect of higher rates. As we approach Q3, interest rates continue to be the dominant force driving economic conditions in the U.S. Here’s what you can expect for the employment market in the coming months. 

Recap of the April 2024 Jobs Report

The US economy added 175,000 new jobs in April, which was lower than in previous months. On a brighter note, the unemployment rate remained unchanged at 3.9%.

This report was somewhat disappointing, as there have been over 200,000 new jobs created in previous months. Many economic analysts believe that this indicates that the US labor market may be showing signs of cooling. This lack of momentum can also be seen in the US GDP growth data, as Q1 2024 GDP growth was lower than it was in Q3-Q4 2023.

One relatively positive sign to note is the US unemployment rate has remained below 4% since February 2022. The unemployment rate previously peaked at 14.9% in February 2020 and has since recovered and remained at a historical low.

Some of the strongest job gains were in industries like healthcare, retail, and transportation and warehousing. Meanwhile, there were not any strong gains in other key industries like manufacturing, wholesale, financial services, and professional and business services.

US equity markets did not sell off strongly due to this Jobs report miss, as most investors are probably more concerned with new approaching inflation data. The stock market could be vulnerable to pullbacks following any potential weak Jobs reports or inflation data released in subsequent months.

What’s the Job Market Outlook for Employers?

This report may be a negative sign for those seeking employment, despite the low unemployment rate. Job gains have been concentrated in a handful of industries, and many key industries in the United States have had negligible or no job growth this year. For example, the retail and hospitality sector now only has 16.9 million workers, which is on par with the lows from February 2020.

Another significant trend to note is the rise of the gig economy and part time work in the United States. The number of part time employees in the United States has risen by 1.63 million since April 2022. Moreover, around 16.4% of the US population is involved in the gig economy, which could include some employed individuals as well. While the unemployment rate is still very low, many individuals may be struggling as they juggle multiple jobs, or utilize the gig economy to supplement their salary and combat inflation.

New data from April also shows that the unemployment rate could increase in the coming months. Many Americans are beginning to file unemployment claims due to the tougher labor market conditions. Weekly jobless claims recently rose by 22,000, which was the highest level in eight months.

The Federal Reserve’s Reaction

The Federal Reserve will likely be very cautious about hiking interest rates, given that inflation has failed to reach its 2% target. During the recent Fed meeting, Jerome Powell discussed how he remained highly attentive to inflation risks.

This report also mentioned that payroll gains averaged at 276,000 per month during the first quarter of 2024. The new data from April 2024 suggests we may be in a new downtrend and that the labor market could be cooling.

Consequently, the Federal Reserve decided to keep the target rate for federal funds at 5.25-5.5%. While the cooling labor market may make the Federal Reserve consider cutting rates, it is not likely in a place to do so until inflation reaches its 2% target.

Chart showing expectations for the federal funds rates broken down month by month.

Source: Morningstar (©2024, Morningstar)

What’s the Outlook for Interest Rates in Q3?

Interest rates have reached a new historical high not seen in decades, which has shocked many consumers.

The likelihood of an interest rate cut in Q4 2023 has drastically been reduced, as the Federal Reserve has consistently mentioned that rate cuts would not be possible until inflation falls to its 2% target. It may take longer for the Federal Reserve to deliver rate cuts to support the economy.

A recent analysis from Morningstar projects that the Federal Reserve will be able to lower its Federal Funds rate to 1.75-2% by the end of 2026. The aggressive rate hikes of 2022-2023 have helped the Federal Reserve contain inflation, and it may be in a position to begin cutting rates later. However, it does not appear in the position to do so in the short term.

However, many businesses and consumers will still be impacted by higher interest rates. Businesses with variable interest rate loans will face higher interest expenses. Moreover, many consumers are also struggling in this high rate environment, which may make it difficult for some businesses to pass costs on to their customers.

Closing Thoughts for SMEs

The next two quarters will likely be a very volatile time for the US economy and stock market. The Federal Reserve will have to make key decisions about potentially cutting rates to achieve a soft landing.

SMEs should strongly pay attention to the new Jobs report, which indicates the labor market may be cooling. Job seekers may have less power in the coming months if these reports continue to follow the same trend. However, companies should also consider rising wages, which could put more pressure on their margins.

There also appears to be signs of weakening economic conditions and a potential comeback in inflation, as the Federal Reserve has not verified its ability to cut rates and combat inflation. The Federal Reserve will likely need several months to assess economic conditions, and determine if rate cuts are in the cards.

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About the Author

Miguel Alexander Centeno

Miguel Alexander Centeno is an author, speaker, and tax leader at Tax Hack Accounting Group. A former Big 4 tax manager, he represents taxpayers in all matters before the IRS, including the U.S. Tax Court. He has been quoted in the Wall Street Journal, Fox Business, and MSNBC on tax related articles and has testified before the U.S. House of Representatives as a part of hearings for the Tax Cuts and Jobs Act. A father of three, Miguel is an avid acoustic guitar player, gravel cyclist and once-a-week yogi.
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