Nonfarm payroll employment posted a 175,000 increase in April, below consensus and lower than the average monthly gains of 251,000 in 2023. The unemployment rate increased slightly to 3.9% and wage growth rose by just 0.2%.
Notable weakness was seen in professional and business services, which declined by 4,000. This reduction was primarily due to a 16,000-job decline in temporary workers, a segment which typically sees the first job cuts. Employment in the services sectors increased by 153,000, led by 95,000 gains in the health and education sector.
The Fed has signaled that they plan on cutting interest rates this year but emphasizes the need for data dependence in future rate cuts. The Fed has also cited a lack of confidence that inflation is maintaining a path towards their 2% target due to the most recent data coming in hotter than expected. In March, the US economy recorded a 2.8% YoY increase in the Fed’s preferred inflation metric, the personal-consumption expenditures index which excludes food and energy. As a result, consensus forecasts have postponed expectations of rate cuts from the first half of the year to the second. All else equal, the impact of lower interest rates will improve values, as the cost of borrowing becomes less expensive.
Expectations between economists for the remainder of 2024 became muddied from the stickiness of inflation, the resiliency of job numbers and consumers, and comments from the Fed citing a lack of confidence in curbing inflation. While this led to speculative headlines, such as potential rate hikes, our view is that current rates are sufficiently restrictive.
As a result, we expect growth to continue to moderate in 2024, leading to rate cuts during the September and December meetings. Further rate cuts are anticipated in 2025, followed by renewed growth. Our base case is for GDP to increase by 2.0% during 2Q24 before slowing significantly during the second half of the year. Growth is expected to rebound in 2025, as the Fed would lower interest rates. In this soft-landing scenario, investors should benefit from the durability of income in real estate and stabilization of prices in 2024, followed by a return to growth in 2025.
