The April Employment Report missed on the headline jobs growth number (164,000 vs. 193,000 expected) but other metrics paint it as a solid report, that just like in Goldilocks, is not too hot nor too cold. The lack of accelerating wage growth (2.6%YoY vs. 2.7% expected) will keep inflation fears at bay, even with the two-tenths decline in the unemployment rate (3.9% vs. 4.1%). That dip is largely a result of a decline in the labor force that seems at odds with other readings in the report and could be partially reversed with the May release. In summary, this is yet another solid jobs report that will give the Fed additional confidence for the expected rate hike in June. The modest wage gains, however, indicate some labor market slack remains and as such will keep demand-push inflationary pressures at bay. In all, this report keeps the Fed’s planned three-hikes-in-2018 scenario solidly in place, but either a bigger pick-up in wages and/or inflation will be needed to get to a fourth hike. Currently, the 10-year note is up 5/32nds in price to yield 2.93%.
|Economic News||Average Hourly Earnings YoY||Market Rates|
For the month, 164,000 jobs were created missing the 193,000 expected, but well above the 135,000 jobs created in March (upwardly revised from 103,000). With the government sector subtracting 4,000 jobs, private payrolls increased by 168,000 versus 190,000 expected and 135,000 in March (revised up from 102,000). While the headline jobs numbers missed expectations by 29,000 the March print was revised higher by 32,000 so nearly a wash over the two months. Digging into the job categories, 119,000 service-producing jobs were added in the month led by professional and business services (+54k), with the health-care category (+29k) carrying the day there. Meanwhile, 49,000 goods-producing jobs were added with manufacturing (+24k)and construction (+17k) leading the gains in that category.
Wage gains once again didn’t provide any indication that labor market tightening was leading to greater pay increases. That result, even with the drop in the unemployment rate, seems to indicate continued slack in the labor market which is confounding analysts and the Fed. For example, average hourly earnings for April increased 0.1%, missing the 0.2% expectation and short of March’s 0.2% gain, which was revised down from 0.3%. In addition, year-over-year earnings ticked down to 2.6%, missing the pre-release expectation and prior month’s 2.7% result. Average weekly hours remained unchanged from March at 34.5 hours.
The stable hours worked is a change from the beginning of the year where a decline in January was partially responsible for a bump in average hourly earnings that created something of a false dawn that wage gains were beginning to ramp higher. That was not the case as YoY gains fell from January’s 2.8% to the 2.6% in this report. The 2.6% YoY wage gain remains in the 2.5% - 2.7% range of the past year but still shy of the 3.0% to 3.5% pre-recession annual rate.
Meanwhile, the unemployment dipped to 3.9%, after six straight months at 4.1%. The drop was due to a 239,000 decrease in unemployed but the Household Survey also noted a drop of 236,000 in the labor force with only a slight 3,000 increase in new jobs. The large shrinkage of the labor force seems a little odd so the 2/10ths drop in the unemployment rate may get partially reversed in May if the labor force reading rebounds.
The broader underemployment rate (unemployed plus part-timers seeking full-time work, and those willing to work but not actively looking divided by the labor force) dipped to 7.8% from 8.0% which is a new cycle low. Working to increase the rate was the aforementioned shrinkage in the labor force (which as the denominator increases the U6 rate) but that was more than offset by a decrease of 239,000 in the ranks of the unemployed, a 90,000 decline in marginally attached workers, and a decrease of 34,000 in part-time workers. This rate bottomed in the 7.9% - 8.2% range prior to the recession so it indicates we may be near the full employment zone.
The labor force participation rate (labor force divided by civilian population) dipped from 62.9% to 62.8%. The average for all of 2017 was 62.7%. The downtick this month is a direct result of the aforementioned decrease in the labor force. As we mentioned, that labor force shrinkage seems at odds with other results in the report so it could well be a survey anomaly that is reversed in May which may force the unemployment rates to tick higher after this report’s two-tenths dip. Keeping that in mind, the current reading pales in comparison to the 66% level that prevailed pre-crisis, so moving anywhere close to that in the near future seems almost impossible given demographic forces of increasing boomer retirements versus modest population gains.
In summary, this is yet another solid report that will provide additional rationale for the expected rate hike in June. The modest wage gains, however, indicate some labor market slack remains and as such is keeping demand-push inflationary pressures at bay. In all, this report keeps the Fed’s planned three-hikes-in-2018 scenario solidly in place, but either a bigger pick-up in wages and/or inflation will be needed to get to a fourth hike.
Average Hourly Earnings YoY
Average hourly earnings has become perhaps the most important metric in the monthly employment reports and the April report is a good case in point. Despite a two-tenths drop in the unemployment rate to a cycle-low of 3.9%, wage gains were very modest at 0.1% month-over-month and year-over-year the figure dipped from 2.8% to 2.6%. The graph shows the trend in YoY earnings for non-supervisory workers (since records exist back to the mid-60’s). As you can see, the mid-2% wage gains of late pale in comparison to prior periods and that should work to keep inflation from accelerating, and keep the Fed from adopting a more aggressive rate hike schedule.