US employment gains expected in March; jobless rate seen falling to 3.7%

U.S. job growth likely continued at a brisk clip in March, with the unemployment rate falling to a new two-year low of 3.7% and wages re-accelerating, which would position the Federal Reserve to raise interest rates by a hefty 50 basis points in May.

The Labor Department's closely watched employment report on Friday would underscore solid momentum in the economy as it confronts rising headwinds from inflation, tighter monetary policy as well as Russia's war against Ukraine, which is further straining global supply chains and adding to price pressures.

The Fed last month raised its policy interest rate by 25 basis points, the first hike in more than three years. Policymakers have been ratcheting up their hawkish rhetoric, with Fed Chair Jerome Powell saying the U.S. central bank must move "expeditiously" to hike rates and possibly "more aggressively" to keep high inflation from becoming entrenched.

March's employment report and the consumer prices data on April 12 will be crucial to the Fed's rate decision at its May 3-4 policy meeting. "The broad view of a tight labor market, will continue to extend into March," said Sam Bullard, a senior economist at Wells Fargo in Charlotte, North Carolina.

"Clearly, that's one of the things the Fed is looking at, in addition to inflation and the inflation outlook, as they prepare to potentially ramp up the pace of policy tightening going forward." The survey of establishments is likely to show that nonfarm payrolls increased by 490,000 jobs last month after surging 678,000 in February, according to a Reuters poll of economists.

Estimates ranged from as low as 200,000 to as high as 700,000. Though March's anticipated job growth would be slower than February's robust pace, it would still be in the 424,000-678,000 range set over the past six months.

A smaller number in March could also be offset by expected upward revisions to February's count. Payrolls data have been subject to large upward revisions in recent months.

Demand for hiring is being driven by a sharp decline in COVID-19 infections, which has resulted in restrictions being rolled away across the country. There is no sign yet that the Russia-Ukraine war, which has pushed gasoline prices above $4 per gallon, has impacted the labor market.

Job gains last month were likely across the board.

"Any miss on the payrolls number won't be a story of crumbling labor demand by any means," said Simona Mocuta, chief economist at State Street Global Advisors in Boston.

There were a near record 11.3 million job openings on the last day of February, government data showed on Tuesday, which left the jobs-workers gap at 3.0% of the labor force and close to the post-war high of 3.2% in December. The labor pool is expected to have continued to gradually increase in March.

WORKERS COMING BACK

According to a report from global outplacement firm Challenger, Gray & Christmas on Thursday, the skyrocketing cost of living was "causing workers who were depending on savings or investments to seek out paid employment." Annual inflation rose in February by the most in 40 years.

Inflation is also getting a boost from companies raising wages as they jostle for scarce workers.

Average hourly earnings are forecast rebounding 0.4% after being flat in February. That would lift the annual increase to 5.5% from 5.1% in February. Monthly wage gains could come in below expectations. Data for the employment report is collected during the week that includes the 12th day of the month.

"Since the 15th of the month fell outside the reference week, increases in bi-monthly pay in the period were less likely to be captured in the survey, raising the odds of another below-trend result," said Kevin Cummins, chief U.S. economist at NatWest Markets in Stamford, Connecticut.

The average workweek likely held steady at 34.7 hours. Details of the household survey, from which the unemployment rate is derived, are expected to mirror the strength in the establishment survey. The jobless rate is forecast dropping to 3.7%, the lowest since February 2020, from 3.8% in February.

The decline is expected even as the labor force participation rate, or the proportion of working-age Americans who have a job or are looking for one, is seen increasing from 62.3% in February, which was the highest since March 2020.

The employment report would further dispel financial market fears of a recession following a brief inversion of the widely tracked U.S. two-year/10-year Treasury yield curve this week.

Economists said the Fed's massive holdings of Treasuries and mortgage-backed securities made it hard to get a clear signal from the yield curve moves. They also noted that real yields remained negative. Others argued that the two-year/five-year Treasury yield curve was a better indicator of a future recession. This segment has not inverted.

"Inversion or not, it does not imply an imminent recession," said Padhraic Garvey, regional head of research at ING in New York. "An inverted curve only tells us that a recession is coming two to fours years down the line. A lot can happen over that period."

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)