March jobs report: Whipsawing month to month

The March employment report added a significantly stronger-than-expected 178,000 gain in payrolls last Friday. That positive headline, however, was offset by a sharp downward revision (to a loss of 133,000 jobs) in February’s report, far weaker than initially reported. This revision is likely to draw the Fed’s attention, as it reinforces concerns that the labor market may be softening. With inflation pressures also expected to rise, policymakers are facing an increasingly difficult trade-off.

• Total non farm payrolls increased by 178,000 in March, significantly above expectations for a 65,000 gain. Although this gain appears to reverse February’s reported weakness, the prior month was revised much lower, with job losses now totaling 133,000. Taken together, these swings highlight the recent volatile month-to-month whipsaw of the labor market. Ultimately the volatility reflects a mix of one-off factors such as healthcare-related strikes, bad weather, and changes in the BLS’ methodology, as well as structural forces such as demographic headwinds and reduced immigration.
• Job growth was relatively broad-based. Hiring was strong across healthcare, which gained 91,000 jobs, lifted by the end of worker strikes. Cyclically exposed industries also showed robust job gains, with leisure & hospitality, transportation & warehousing, and construction all reporting hiring. Meanwhile, manufacturing also added jobs, the most since November 2024, as tariff uncertainty gradually ebbs.
• On the other hand, the finance & insurance industry led job losses, while the federal government also recorded the fourteenth consecutive month of contraction amid broad restructuring in government employment. 
• The unemployment rate surprisingly declined to 4.3%, from 4.4% in the prior month, driven in part by a fall in the labor force participation rate, which ticked down to 61.9%, the lowest level since November 2021. This reflected an employment decline among those aged 20-24, suggesting headwinds to recent college graduates entering the labor force.
• The number of permanent layoffs ticked down in March, while the median duration of unemployment has continued to rise, now at 11.5 weeks, the highest level since the pandemic. Additionally, average hourly earnings moderated further, growing 3.5% from a year ago. All of this is indicative of the low-fire, low-hire environment, which has seen employers hoard existing labor but reluctant to expand hiring amid ongoing macroeconomic uncertainty. 

This month’s report highlights a complicated set of crosscurrents that the labor market is facing. Though the rebound in March hiring was a welcome development, it comes amid a worse picture for February. One-off factors like weather and strikes, together with methodology changes, are also exacerbating the whiplash of the data from month-to-month.

Overall, a single strong data point won’t be enough to change the labor market's underlying trajectory, which has continued to soften. Indeed, last month’s downward revision means the Federal Reserve cannot dismiss the risk of further weakening, especially as it is likely too early to see the effect of the Middle East conflict on labor demand. However, with inflation also set to rise, the Fed is facing a tough predicament. Ultimately, we expect the Fed to keep policy rates on hold as it assesses the impact of higher energy prices on the economy, before resuming its next rate cut in the back half of this year.