Takeaway: The March jobs report, which is hot on its surface, will not move rates much. The underlying fundamentals of the report are weaker than the headline, and the Iran war continues to dominate economic data in driving market moves.
178,000 jobs were created in March, when forecasters only expected 65,000. The unemployment rate unexpectedly declined to 4.3%, but a look under the hood shows a still-tepid labor market with risks to come.
- Because the new birth-death model–a statistical method to account for jobs created and lost due to firm creation and destruction–means the headline job creation number is much more volatile than before, we should focus on the three and six month average instead of the March number. Those show that 68,000 jobs have been created per month over the past three months and 15,000 jobs on average over the past six months. In other words, the labor market remains slow, but it’s better than it was in the fourth quarter of 2025 when the Fed was cutting rates.
- Part of the large gain in March came from the Kaiser Permanente strike, which took away 31,000 jobs in February only for them to return in March.
- While the unemployment rate did unexpectedly decline 0.18 percentage points to 4.26%, the underlying reason was that fewer people chose to look for jobs. The employment to population ratio declined by 0.04 percentage points and the labor force participation rate declined by 0.16 percentage points.
- One positive aspect of this report is that only 43% of the job gains were concentrated in healthcare, which is much lower than in prior months where healthcare accounted for nearly all of the job gains.
- All of the above data references the second week of March, when the Iran war was just getting underway. The conflict and associated effect on oil and gas prices should weaken the labor market the longer it drags on.
The Fed will remain on hold until there is further clarity on the duration and fallout from the war with Iran.
- Markets have priced some probability of rate hikes in 2026, but the bar for the Fed to hike is very high and unlikely to be met given the current state of the labor market. It is much more likely the Fed will put off rate cuts until there is evidence that core inflation will return to the target level, and the labor market remains weak.
