April Employment Report and NonManufacturing Activity

KEY DATA: Payrolls: +263,000; Private: +236,000; Unemployment Rate: 3.6% (down 0.2 percentage point); Hourly Wages: +0.2%/ ISM (NonMan.): -0.6 point; Orders: -0.9 point

IN A NUTSHELL:  “With job growth strong and the unemployment rate barely measureable, it is hard to see why the Fed would even consider lowering rates.”

WHAT IT MEANS: If the Fed were to cut rates, it would have to see weakness in the labor market.  Well, forget that.  Job gains in April came in well above expectations.  Yes, the headline number was hyped by a surge in local government hiring, which is not likely to last.  But the gains in the private sector were also robust.  Health care, social services, restaurants, construction and employment services added new workers like crazy.  On the negative side, retail keeps thinning its payrolls and utility employment faded.  Otherwise, there were few areas where firms cut workers.  There was one really odd number in the report.  Building and swelling services added almost 21,000 employees, a nearly 1% rise in just one month.  That seems way out of line.  But even excluding that likely aberration, the hiring pace was still strong.  

As for the household side of the report, the unemployment rate dropped to its lowest level since December 1969, near the peak of the Viet Nam War when draft rates sliced the labor force dramatically.  But while the number unemployed fell, so did the labor force, which inflated the decline in the unemployment rate.  The labor force numbers bounce around like crazy, so don’t make too much of that drop or the decline in the labor force participation rate.  Despite the strong demand for workers and the low unemployment rate, wages rose moderately over the month and the increase over the year continued to decelerate modestly.

The strong labor market is keeping the economy going, but the less than stellar income gains are keeping it from accelerating.  We could see that in the Institute for Supply Management’s April report on nonmanufacturing activity.  The overall index eased and the details were mixed.  Activity did expand faster, but order growth moderated and so did hiring.  In addition, orders books filled more slowly.  Basically, this report, when coupled with the manufacturing sector numbers, points to an economy that is growing decently but is not shifting into the next gear.

MARKETS AND FED POLICY IMPLICATIONS:  So much for a faltering economy that requires a kick-start from the Fed.  The labor market is in great shape yet wage inflation is not becoming a major threat.  We can thank the solid gains in productivity for that.  The high level of payroll increases has surprised myself and most other economist but there may be some special factors at work.  The monthly number is a net number.  It takes all additions to payrolls and nets out all reductions, which includes layoffs, company closures and, here is a key, retirements.  Baby-boomers are staying in the workforce longer and the labor force participation rate for those over 65 is rising not falling.  Thus, the willingness to continue working is easing the pressure on firms to find new workers, which indeed are in short demand.  That is the equivalent of reducing the “reductions” portion of the calculation, raising payroll gains.  That may sound somewhat wonky, but it makes sense, at least to me.  It would be awfully hard for the Fed to explain a rate cut given the strong job market. So forget that.  Indeed, this report argues more for a continuation of the normalization process than a reversal of it.  But to raise rates, the Fed would have to see an inflation rate well above target for an extended period.  So a hike is likely off the table for quite a while as well.  As for investors, strong labor markets should buoy expectations that earnings can hold up, even if the Fed is not likely to start mainlining liquidity into the markets’ veins once again.