Bank of America U.S. economist Michael Gapen recently provided insights into the expected performance of the U.S. employment sector for April, forecasting nonfarm payrolls will see an increase of 250,000, marking a slight deceleration from the 276,000 average gain over the previous three months.

That marks a slightly above-than-consensus view, as the median economist expects nonfarm payrolls to come in at 243,000 in April.

Government job gains are expected to show a 50,000 increase, while the private sector is expected to have increased by 200,000 jobs. In the larger context, Gapen outlined that employment growth “has been driven by state and local government, healthcare, education and leisure and hospitality sectors.”

On the topic of overall wage growth, there has been a recent deceleration to about 0.3% m/m, bringing the year-on-year rate down to 4.1% in March from higher levels previously.

However, Gapen predicted a temporary reversal of this trend in April saying that average hourly earnings could see a month-over-month increase of 0.4% or a year-on-year increase of 4.2%. This was notably higher than the consensus forecast which anticipated a rise of 0.3% month-over-month and 4.1% year-on-year.

A significant factor influencing this forecast was the recent implementation of a new minimum wage law in California, setting the hourly rate for fast-food workers at $20.

This legislative change was expected to impact around 550,000 employees, or 0.4% of the private payrolls nationwide and 3.6% of California's employment.

Gapen underscored that this adjustment could drive up average hourly earnings and potentially stir concerns about inflationary pressures within financial markets.

With the unemployment rate projected to remain stable at 3.8% and the participation rate holding at 62.7%, Gapen interpreted these figures as indicative of an economy that adjusted its employment expectations, possibly due to increased immigration raising the breakeven hiring rate to around 250,000.

Implications For Federal Reserve’s Policy

Looking at broader implications, Gapen doubted whether the Federal Reserve could ease policy this year. He said, “Faster wage growth, even if driven by a one-off increase in the California minimum wage rate for fast food workers, may leave the Fed wanting more data and favoring a higher-for-longer policy stance in the meantime.”

If the upcoming employment report aligned with expectations, Bank of America anticipated minimal impact on the market’s current pricing of Federal Reserve rate cuts. Currently, the markets factored in approximately 1 to 1.5 rate cuts for the year.

Conversely, stronger-than-expected wage growth, as predicted in Gapen’s forecast, might lead markets to adjust their expectations, potentially reducing the likelihood of rate cuts in 2024.

Furthermore, if the employment figures closely match Gapen’s projections, then Bank of America would continue to support the prediction that the Fed might begin its rate-cutting cycle only in December.

“For the market to price in a greater likelihood of a September cut — or a more sizeable cut — we would likely need to see a sharper drop-off in job growth and another increase in the unemployment rate. Any weakening in the labor market is an obvious catalyst for Fed easing,” Gapen wrote.

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