US economy adds 916,000 jobs in March as recovery hopes grow

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The US economy added 916,000 jobs in March and the unemployment rate edged down to 6 per cent in a sign that the recovery was accelerating in the month that Joe Biden signed his $1.9tn stimulus into law.

The non-farm payrolls data released on Friday exceeded economists’ expectations and marked a sharp improvement from the upwardly revised 468,000 jobs created in February and 233,000 positions created in January.

The improvement in the labour market has occurred amid optimism over America’s fight against the pandemic, as a winter surge in infections has ebbed and the rate of vaccinations picked up sharply.

In the past few weeks, Covid-19 cases have started to increase again but the pace of inoculation has continued to rise, raising hope of further improvement in coming months.

The March job gains were not only larger than in previous months, but more broadly based. Hiring in the leisure and hospitality sector, which has been especially sensitive to the ups and downs of the pandemic but drove last month’s job gains, slowed from a pace of 384,000 to 280,000.

Column chart of Change in total US non-farm payrolls (m) showing US job growth accelerates in March

But goods-producing employment, including manufacturing and construction, bounced back sharply, from job losses of 44,000 in February to a gain of 183,000 positions last month. Government hiring surged to 136,000 after shedding 90,000 jobs in February.

The report weighed on the prices of short-term government bonds, with some traders positioning for the prospect that a faster economic rebound could prompt the US central bank to tighten policy faster than previously thought. The yield on the two-year note, which has been anchored near zero, rose 0.03 percentage points to 0.19 per cent. It was one of the largest one-day increases in the yield on the note over the past year.

Future interest rates implied from Fed funds futures and eurodollars also climbed on Friday, underlining the shifts by investors.

“It seems to be the recovery [is] happening much more quickly than people thought could possibly move the Fed into a position where they may have to do something sooner rather than later,” Tom di Galoma, a managing director with Seaport Global Holdings, said. “The front-end is starting to price in a tightening.”

Line chart of Yield on two-year US Treasury (%) showing Short-term Treasury yields climb as investors debate Fed reaction

The economic recovery in recent months had predominantly hit long-term US Treasury debt, lifting yields on the 10-year note to more than 1.7 per cent. But Federal Reserve officials have not expressed any alarm over rising borrowing costs or even the likely surge in inflation this year, saying it is likely to be transient.

Long-dated US government bonds, which recently notched the worst quarterly performance since 1980, slid after the data was released.

The benchmark 10-year Treasury yield climbed 0.05 percentage points to 1.72 per cent in morning trading in New York, not far from the 14-month peak of 1.78 per cent reached earlier this week. 

Five and seven-year Treasuries were also under pressure. The yield on the five-year note rose just under 0.08 percentage points to 0.98 per cent, while the 7-year traded 0.06 percentage points higher to 1.42 per cent.

Major stock markets globally, including US exchanges, are closed for the Easter weekend. Speaking before heading to Camp David for the holiday on Friday, Biden said the US still had “a long way to go to get our economy back on track” but the improvement was evident.

“My message to the America people is this: Help is here. Opportunity is coming”.

The strength of the jobs report was amplified by the decline of the unemployment rate from 6.2 per cent to 6 per cent, as more Americans found jobs and more looked for jobs, with the US labour force expanding by 347,000 people.

Line chart of Underemployment is still above 10%, underscoring the stress on households showing US unemployment has fallen sharply from postwar high hit in 2020

“The [rebound] still leaves employment 8.4m below its pre-pandemic peak from just over a year ago but, with the vaccination programme likely to reach critical mass within the next couple of months and the next round of fiscal stimulus providing a big boost, there is finally real light at the end of the tunnel,” said Paul Ashworth, chief US economist at Capital Economics.

Brian Levitt, global market strategist at Invesco, said the report was “confirmation of what we all were starting to pick up on some months ago, which was that the economy is accelerating and the vaccine rollout is a game changer”.

“You add on top of that the fiscal support [with] a lot of money set to be deployed . . . and as a result you are seeing businesses hire to address current demand and get in front of future demand.”

The recovery seen in the labour market has not erased the scarring caused by the pandemic, and investors expect the US central bank and the White House to continue to stimulate the economy given millions of Americans remain out of work.

“Today’s report confirms that labour market conditions are decidedly improving but reaching broad-based and inclusive full employment will be a multiyear process. As such, we expect the Fed to keep rates steady until mid 2023,” said Nancy Vanden Houten, lead US economist at Oxford Economics.

“People will focus on the fall in the unemployment rate but that number is not that relevant in terms of what the Fed is looking for,” added Gershon Distenfeld, the co-head of fixed income at AllianceBernstein. “What really matters is what does the economy look like when we open up? How much of the supply side has been damaged?”

Line chart of Change in US employment from 2000 (millions of people) showing Millions of Americans are still out of work

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