In March, job growth surged, while wage growth remained restrained, aligning with economists' views that the U.S. can sustain employment growth without stoking inflation.
The Labor Department's report on Friday revealed that U.S. employers added 303,000 jobs in March, surpassing economists' expectations of 200,000. The unemployment rate dropped to 3.8% from February's 3.9%, in line with forecasts.
However, average hourly earnings only increased by 4.1% from a year ago, the smallest gain since June 2021.
Recent economic data had investors concerned that the Federal Reserve might delay interest-rate cuts.
The robust job report contributes to these concerns, as it indicates that the central bank is comfortable with its current wait-and-see approach to interest rates, rather than being motivated by inflation worries.
All three U.S. stock indexes rose on Friday, with investors choosing to focus on the economy's strength rather than its implications for the Fed.
Throughout 2022, strong economic activity and hiring were seen by senior Fed officials as obstacles to reducing inflation.
They were concerned that tight labor markets would keep wage pressure high, thus hindering inflation from returning to the Fed's 2% target.
However, Fed Chair Jerome Powell has recently signaled a change in this view, noting that the growing labor force, fueled by increased immigration, has prevented the economy from overheating despite brisk hiring.
Powell and other Fed officials now suggest that upcoming inflation data will be more critical in determining whether the central bank can cut rates in June.
The consumer-price index for March, set for release by the Labor Department next week, will be closely watched following firmer-than-expected inflation in January and February.
While some Fed officials argue against preemptive rate cuts due to the risk of inflation exceeding the 2% target, traders are dialing back expectations for rate cuts this year.
Interest-rate futures now suggest one or two quarter-point cuts are more likely than the three forecast by Fed officials in March.
Many economists, like the Fed, believe that increased immigration has boosted the supply of available workers, allowing for faster job growth.
However, demand is also crucial, and currently, there appears to be ample demand.
Layoff rates remain low, and there are still many unfilled jobs, with 8.8 million openings reported by the Labor Department as of February's end.
Despite these positive indicators, the share of people quitting their jobs has returned to pre-pandemic levels, suggesting that the intense competition for workers has eased. Moreover, job growth has been concentrated in sectors like private education and healthcare, and leisure and hospitality.
These sectors, described as "high touch" by economists at Bank of America, have added 1.5 million jobs in the past year but are still below their pre-pandemic trend.
The return to normalcy in these sectors could be slower due to structural changes adopted during the pandemic, such as the adoption of technology in place of traditional practices.
Looking ahead, employment growth in these sectors may vary.
While leisure and hospitality could continue to face challenges due to lingering effects of the pandemic, private education and healthcare may see steady growth, driven by the aging U.S. population's increasing healthcare needs.
If these sectors continue to close the employment gap, as expected, it could bolster overall job growth into the next year.