April Jobs Report in Moderation
Financial Review by Sinclair Noe
DOW + 267 = 18,191
SPX + 28 = 2116
NAS + 58 = 5003
10 YR YLD – .03 = 2.15%
OIL + .49 = 59.43
The economy added 223,000 new jobs in April. The unemployment rate dropped to 5.4% from 5.5% to mark the lowest level since mid-2008. The results were fairly close to estimates. Not too much, not too little. Wall Street actually liked the “Goldilocks” report and the Dow jumped to triple digit gains; the bond market, which is usually only happy when it rains saw strong initial selling, but then pushed bond yields slightly lower, and the dollar spiked briefly then held near lower levels. Once again we are reminded that the jobs report is probably the single most important economic report to follow because it affects almost everything else in the economy.
The number of jobs added in March was revised down to 85,000 from 126,000, reflecting the smallest increase in almost three years. The February jobs report was revised higher by 2,000 from 264,000 to 266,000. Payrolls for February and March were revised down by a combined 39,000. Typically, revisions add to prior months numbers. In 2014, for example, the government upgraded every monthly employment report except for one to show stronger job creation that originally estimated. The past three months have delivered average job gains of just over 191,000 jobs per month. That’s down from last year’s 260,000 average, but still decent. Another consideration: more people are hired in April than any other month of the year if seasonal adjustments are thrown out. And the number of jobs created in April with seasonal adjustments has exceeded the annual average in seven of the past 10 years.
By the way, revisions are to be expected. The Bureau of Labor Statistics’ monthly Employment Situation presents numbers compiled from two data sources: the payroll records of some 143,000 businesses and a telephone survey of about 60,000 households. The numbers are then seasonally adjusted. And over the next two months, the BLS revises the numbers “to incorporate additional sample reports and recalculated adjustment factors,” which can easily lead to big shifts in the data. It doesn’t mean the data is wrong, it just means that it is an almost impossible task to count all jobs every month with absolute accuracy, and this is a more or less accurate measure.
The average wage of American workers rose by 3 cents to $24.87 an hour in April, or a 0.1% increase. The increase means wages in the past 12 months have risen at a 2.2% rate. The amount of time people worked each week was unchanged at 34.5 hours. Workers are getting slightly higher wages on average, but the typical worker doesn’t feel any richer after taking inflation into account. Anemic wage growth has been one of the disappointing themes of the post-financial crisis recovery. Last week we saw a report showing a big 0.7% Q1 jump in the employment cost index, and that had some people suggesting that the US economy has gone “beyond full employment.” Today’s numbers don’t show hardly any wage pressure. Despite the best year for hiring in more than a decade, the share of the nation’s income going to workers remains near an all-time low. You need strong wage increases to create a wage/price spiral, and the 0.1% increase in hourly wages wasn’t strong. One side note: the April report looks only at hourly wages, and not the wages of salaried workers.
Worker productivity slipped in the first quarter while labor costs surged, according to a Labor Department report Wednesday. The report marked only the third time in 25 years that productivity has suffered back-to-back quarterly declines. Lower productivity is usually a negative for the economy because it suggests that workers are becoming less efficient. It might also reflect weak capital expenditures by businesses.
Private sector jobs grew by 213,000, and the government sector added 10,000. Professional and business services added 62,000 jobs, health services added 61,000; mining and logging, which includes oil exploration and drilling, lost 15,000 jobs – reflecting ongoing weakness due to lower oil prices. Manufacturing employment was flat, reflecting the lingering effects of a stronger dollar that has curbed the sale of U.S. exports by making American goods and services more expensive.
Construction added 45,000 – construction jobs are a particularly positive sign of economic growth, but it might just be a sign of pent-up demand following a harsh winter. Home sales staged a big comeback in March, a possible sign that more Americans are eager to make expensive purchases. People bought existing homes at an annual pace of 5.19 million. The National Association of Realtors said those gains are expected to extend into April based on figures on signed contracts released by the Realtors. This could help spur additional growth in the construction sector as builders seek to meet demand. The combined employment in residential building construction and housing-related specialty trades posted the biggest advance since January 2006.
Among the major worker groups, the unemployment rate for Asians increased to 4.4 percent. The rates for adult men (5.0 percent), adult women (4.9 percent), teenagers (17.1 percent), whites (4.7 percent), blacks (9.6 percent), and Hispanics (6.9 percent) showed little or no change in April.
The rapid gains in employment over the past year, however, still have not made a huge dent in the number of people forced to work part time or those who have been unemployed for longer than six months. Some 6.6 million Americans can only find part-time jobs and while that is historically high, it is down from a peak of 9.2 million in 2010. Total employment is up 3 million from the peak and up 11.7 million from the employment recession low. Still, 2.5 million have been out of work for at last half a year. And there are about 15 million unemployed Americans who say they would like a job, even though they might not be actively looking.
The BLS has six measures of unemployment, numbered U-1 through U-6. U-3 sits in the middle and is the official rate. But U-3 leaves out a few sizable groups, “discouraged workers,” “marginally attached” and “part time for economic reasons.” Broadly speaking, this is a group that’s working either intermittently, or not at all and not even looking. The U-6 captures all those folks, and is the broadest measure of unemployment. It hit 10.8% in April, down from 10.9% a month ago and 12.3% a year ago. Think about how different our national conversation would be right now if we were talking about a 10% unemployment rate instead of a 5% rate.
The Labor Force Participation Rate increased 0.1% in April to 62.8%. This is the percentage of the working age population in the labor force. The higher number would indicate that more people are looking for work, or at least that employers are cutting fewer and fewer jobs. A large portion of the recent decline in the participation rate is due to demographics, as the boomer generation moves into retirement. The four-week average of the number of Americans applying for unemployment benefits fell to 279,500 last week, the lowest level in 15 years, according to the Labor Department. This figure tends to anticipate stronger hiring, though it’s possible that companies facing uncertainty are refraining from layoffs while delaying hiring until they get a better sense of the economy.
The unemployment rate and the Labor Force Participation Rate only tell part of the story, so we look to a subset, the participation rate and employment population ratio for people age 25-54, the prime working years. The 25 to 54 participation rate increased in April to 81.0%, and the 25 to 54 employment population ratio was unchanged at 77.2%; that’s still lower than it was at the lowest point of the previous two U.S. recessions.
All investment questions these days seem to revolve around when the Federal Reserve will raise interest rates, the April report didn’t provide any clear answers. The rebound in the April job report gives the Federal Reserve the green light to raise interest rates later this year, but no reason to rush. The data gives support to the consensus view at the Fed that weak first-quarter growth was an aberration, a blip in an otherwise decent economy. The unemployment rate at 5.4% is now closing in on the 5% rate, which many Fed officials consider consistent with full employment. Even without wages or inflation picking up, Fed policymakers will feel uncomfortable with rates sitting at zero as the unemployment rate closes in on 5 percent. And what today’s report shows is that the economy is plodding along to recovery, slowly and consistently. It wasn’t a great report today, but it did not confirm the weakness of the March report, either. This slow improvement means the Fed can take their time before raising rates because the economy is not likely to get super-heated. So, forget about a rate increase in June, there is no need.
Many economist now think a September rate hike is possible. Fed policy makers have said some of the headwinds holding back the US will probably fade and give way to “moderate” growth; they have also said they will be data dependent; they have also indicated that it might be better to actually see the economy reach full employment before taking action – no need for a premature rate hike that might choke off growth.
Traders who use futures contracts to bet on the timing and pace of Fed rate hikes are wagering that the central bank will not move until December. Odds implied by Fed Fund futures show investors seeing a mere 7% chance the Fed raises rate in July, from 10% ahead of the jobs report. September odds slip to 22% from 27%. October odds down to 38% from 45%, and December odds to 55% from 62%. And a positive response from stock traders today says they don’t’ think today’s jobs report was strong enough to warrant quick response from the Fed. Of course, a lot can happen between now and then.