By Lucia Mutikani

WASHINGTON (Reuters] – While the U.S. unemployment rate dropped to 3.5% in April pre-pandemic, the pace of job growth slowed to a brisk pace due to widespread shortages. These figures highlight the difficulty the Federal Reserve is facing to control high inflation.

Expect Friday’s Labor Department employment report to be closely monitored. It will show that wages increased solidly in October and emphasize the strength of the economy, despite the drop in GDP in the first quarter.

Sung Won Sohn (a Loyola Marymount University economist in Los Angeles) said, “Consumers have money and businesses want to hire people. But labor shortages are getting worse.” I believe we are witnessing the start of a wage inflation spiral. It will be difficult for anyone, not just the central bank, to break it.

A Reuters survey found that nonfarm payrolls rose by 391,000 jobs in the last month, after increasing 431,000 in March. This would be a decrease in the average monthly gain of 562,000 jobs for the first quarter and an end to an eleven-month-long streak of payroll increases exceeding 400,000. There were estimates of as few as 188,000 jobs being added and as many as 517,000.

According to forecasts, the unemployment rate will fall to 3.5%. This would mark its lowest point since February 2020. In March, the unemployment rate was 3.6%. It has fallen by 4/10ths of an inch this year.

Record 11.5 Million job opportunities were posted on March 31, which increased the gap between workers and employers to 3.4% from 3.1%.

On Wednesday, the Federal Reserve raised its policy rate by half of a percentage point. This is the largest increase in 22 years. It also announced that the U.S. central banks would start trimming its bond holdings starting next month. The Fed began raising interest rates in March. Jerome Powell, Fed chair, said to reporters: “The labor market is very tight. Inflation is far too high.”

Some worry that the Fed might raise rates too much and impede economic growth. Although GDP fell in the first quarter due to a record-breaking trade deficit, domestic demand was robust with strong consumer spending and increased business investment in machinery.

SEASONAL QUIRK

A seasonal glitch could also explain some of the expected slowdowns in payrolls this month. April is the strongest month for job growth. The seasonal adjustment factor is usually used by government to eliminate seasonal fluctuations.

Unadjusted seasonal fluctuations aside, April payrolls have always topped 1 million with the exception 2020 when there was the COVID-19 pandemic.

Ryan Sweet is a senior economist with Moody’s (NYSE) Analytics, West Chester, Pennsylvania. “The seasonal adjust factor anticipates high hiring in April, and on average has reduced seasonally adjusted unemployment by 820,000,” Sweet said. “We are thus assuming 800,000. more drag from the April seasonal adjustment factor.”

Other labor market reports this week showed a growing shortage of workers. All three reported slower job growth in April. Wages are likely to continue their rapid growth rate, despite the widening gap between supply and labor demand.

According to the forecast, average hourly earnings will rise by 0.4%. This is in line with March’s increase. The year-on-year wage growth would be lowered to 5.5%, compared with 5.6% in March. Wage growth may surprise as April’s survey included the 15th of each month.

American workers saw their largest rise in compensation in three decades during the first quarter. This helped support domestic demand.

“Following a very large increase in employment cost in the first quarter evidence of upward pressures wages continuing into this quarter would keep risks tilted toward a more hawkish Fed,” stated Veronica Clark. Clark is an economist at Citigroup New York: (NYSE:)

Powell stated Wednesday that Powell would not consider a 75-basis point rate hike, however some economists feel the Fed may raise its benchmark interest rates above the neutral rate of 2% to 3%.

Others details from the April employment report were likely to have been strong. From 34.6 hours in March, the average workweek will now be 34.7 hours. Last month saw a steady stream of people returning to the workforce. In February and March, 722,000 workers entered the labour force.

The rising cost of living has prompted some retirees to return to work, despite the fact that inflation is at an all-time high.