KEY DATA: Payrolls: +164,000; Private: +168,000; Revisions: +30,000; U-Rate: 3.9%; Wages: +0.1%; Over-Year: +2.6%
IN A NUTSHELL: “The labor market may be tight, but that isn’t doing much for workers, whose wages continue to rise sluggishly.”
WHAT IT MEANS: Has the basic law of supply and demand been repealed for the labor markets or are we using the wrong measures? Businesses added a solid number of new positions in April. While the total was below forecasts, when you add in the upward revisions to February and March, you come out right at consensus. Manufacturing and construction continue to lead the way with outsized increases. Together, they make up about 13% of total payrolls but added 25% of the new positions. It is doubtful that can be sustained for much longer. There were also solid increases in restaurants, warehousing, management firms and health care. Retail, not surprisingly, was weak and state governments cut workers.
The real eye-opener in this report was the decline in the unemployment to 3.9%, the lowest since December 2000. Only once since January 1970, in April 2000, have we had a lower rate. You have to go back to the late ‘60s to find any extended period where the unemployment rate was lower. That was when the Viet Nam War was raging and many young adults, who have a higher than average unemployment rate, were in the military, not out looking for jobs. Even the so-called real unemployment rate, which adjusts for discouraged workers and those that cannot find full-time work, is below what we saw in the 2000s (when no one complained about its level) and is not that far from the late 1990s low. Thus, we are in uncharted territory here, unless you are willing to go back to the early 1950s, when society and the economy were different and the labor force participation rate was well below the current level.
Despite the appearance of a tight labor market, the average hourly wage ticked up modestly and over the year, it is barely keeping up with inflation. That means spending power is going largely nowhere and that raises questions whether households can sustain their spending. Yes, the tax cut is causing take home pay to rise, but given the distribution of the cuts, it is not going to power a lot of spending at the mid and lower income levels.
MARKETS AND FED POLICY IMPLICATIONS: Job growth in April was right on target. It is unrealistic to expect the large increases we saw early this year to be sustained. There just are not enough workers to fill those positions and the “softening” payroll increases is really not a softening. We are closer to sustainable levels and I expect that businesses will probably add between 150,000 to 175,000 new workers per month over the remainder of the year. That is enough to drop the unemployment rate further. But is it enough to force up wages? First, the hourly wage number may not tell us much. It came into existence in early 2007. We don’t know what is normal, high or low. It is also an average, which doesn’t tell us much since it depends upon the distribution of jobs. That said, we are still not seeing any major compensation increases in either the productivity or employment cost reports. If we really are in a tight labor market, wages should be rising faster. So, either our measures are missing the point or there really isn’t a labor shortage. Or, there is a labor shortage and businesses are willing to do without workers and are lengthening delivery times instead. According to the Institute for Supply Management, manufacturing deliveries have been slowing for 19 months while non-manufacturers have been lengthening their delivery times for 28 months. At what point do customers scream enough? I don’t know, but as long as firms can push out deliveries, the fewer workers they have to hire. Right now, that seems to be working. That doesn’t mean the Fed will not have to tighten. It will, especially if growth accelerates as expected during the second half of the year. The members still think the measures of unemployment mean something.