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Orlando's Outlook: April jobs report surprisingly strong

As of 05-03-2013

Bottom line The labor market shrugged off the fiscal restraint from higher taxes and the spending sequester to post much stronger-than-expected employment gains in April, along with significant upside revisions for each of the two previous months, which helped to ameliorate our dark thoughts about March’s dismal results. In addition, the unemployment rate fell to a five-year low of 7.5% and, this time, for the right reasons—positive month-over-month swings of 500,000 household jobs and a 700,000 increase in the civilian labor force. In our view, the surprising strength of this labor report likely keeps the Federal Reserve on the sidelines, as we do not expect them to increase or begin to taper their aggressive $85-billion per month bond purchases until later this year, at the earliest.

Solid nonfarm payrolls April rose by a stronger-than-expected 165,000 jobs, which was significantly above consensus estimates for a gain of 140,000 jobs. Moreover, the Bureau of Labor Statistics (BLS) revised February and March higher by a combined 114,000 jobs. February’s preliminary gain of 236,000 nonfarm jobs, which was revised up to a stronger gain of 268,000 jobs last month, was revised up again to a much stronger final gain of 332,000 jobs. March’s dreadful preliminary increase of only 88,000 jobs was revised sharply higher to a more respectable gain of 138,000 jobs.

Private payrolls strong, too April gained a surprisingly strong 176,000 jobs, which was much greater than the consensus forecast for a gain of 150,000 private jobs, and the BLS collectively revised February and March up by 124,000 jobs. February’s preliminary increase of 246,000 jobs, which was revised up modestly to a gain of 254,000 last month, was revised up again to a powerful final gain of 319,000 private jobs. March’s tepid preliminary gain of only 95,000 was revised up to a much stronger gain of 154,000 jobs.   

Household survey rebounds In what might have been the single most important positive surprise in today’s labor report, April’s household survey soared by 293,000 jobs, which was a significant rebound from March’s outright loss of 206,000 jobs. By comparison, February had posted a solid gain of 170,000 jobs, so the important household survey may be getting back on track. The household survey is an important leading employment indicator for both nonfarm and private payroll growth, so this is a very encouraging development. 

Government job losses slow The difference between private and nonfarm payroll gains in April was the loss of only 11,000 federal, state and local government jobs, compared with 16,000 jobs lost in March and the actual addition of 13,000 jobs in February.   During April, federal hiring fell by only 8,000 jobs, with half of those coming from the postal service, which was not impacted by the automatic budget sequester spending cuts ($85 billion over a seven-month period) that went into effect on March 1. While we certainly expected federal government job losses to be more severe last month, apparently most of the cuts were facilitated through temporary furloughs rather than permanent layoffs.    

Construction and manufacturing both slip While the weather in April was certainly much warmer than in March, it remained unseasonably cold, which likely resulted in the loss of 6,000 construction jobs last month, compared with gains of 13,000 jobs in March and 48,000 jobs in February, which was a six-year cycle high. We expect recovery work from Hurricane Sandy to kick into gear soon, as well as acceleration in housing, so construction hiring should turn up soon. Manufacturing jobs were flat in April, compared with a modest gain of 2,000 jobs in March and a more robust gain of 23,000 new jobs in February. This weakness is not surprising, given the weakness we’ve seen in the national ISM data and in the key regional Federal Reserve data over the past two months. 

Temp hiring stays strong Temporary help—another important leading indicator of employment growth—gained 31,000 jobs in April, versus 26,000 jobs March and 28,000 in February.

Retail rebounds Retailers added 29,000 jobs in April, compared with a cut of 4,000 jobs in March (which had originally been reported as a loss of 24,000 jobs) and versus an upwardly revised gain of 26,000 jobs in February. Putting all three months together, this adds back 60,000 jobs to the retail landscape, which reverses perhaps the biggest negative conundrum from last month’s disappointing labor report.

Wages up, hours worked fall Average hourly earnings in April rose 0.2%, compared with flat wage growth in March, while year-over-year wages rose by 1.9% in April, which was a tick better than March. But the average private workweek for all employees fell to 34.4 in April from 34.6 hours in March, likely due to worker furloughs associated with the spending sequester. That’s significant, as a decrease of 0.2 hours worked is the equivalent of reducing an estimated 600,000 jobs from the economy.

Unemployment falls, participation rate steady, labor-impairment rate rises The unemployment rate (U3) fell to a five-year low of 7.5% in April from 7.6% in March, 7.7% in February and from 7.9% in January. The labor impairment rate (U6)—also known as the “total” rate of unemployment, because it more broadly includes discouraged workers and the underemployed—actually ticked up to 13.9% in April, due to the increase in furloughed workers, meaning that some previously full-time workers are now working part-time. Finally, the labor force participation rate held steady at a 34-year low of 63.3% in April. So for once, the decline in the unemployment rate occurred for the “right” reasons, as household employment rose by 293,000 jobs in April after falling by 206,000 jobs in March, and as the civilian labor force rose by 210,000 workers in April after plunging by 496,000 workers in March. That reduced the number of unemployed by 83,000 workers in April, in an economy that was actually adding jobs last month.

Initial weekly jobless claims plunge Initial weekly jobless claims, an important leading economic and employment indicator, fell to their lowest level since January 2008 at 324,000 claims for the week ended April 27, 2013. To be sure, the corresponding survey week for today’s April labor report was for the week ended on April 13, during which weekly claims were a solid 355,000. But the continued decline in claims over the ensuing fortnight augurs well for the May labor report.

ADP much weaker than expected again, in conflict with strong payroll bounce The ADP report is an important forward-looking proxy for private payroll growth. While this morning’s nonfarm payroll report for April was much stronger than expected, last Wednesday’s ADP report for April was much weaker than expected. ADP rose by only 119,000 jobs in April, which was well below consensus expectations for a gain of 150,000 jobs. In addition, ADP revised the two previous months down by a combined 66,000 jobs. The preliminary gain of 158,000 jobs in March was revised down to a gain of only 131,000, and the addition of 237,000 positions in February was revised down to a final gain of 198,000. The ADP survey,  now seven months into a new methodology, averaged a solid 202,000 new jobs created per month from October through February, so March and April represent sizable—and potentially troublesome—misses. ADP also reported that in April, small firms added 50,000 jobs, mid-sized companies added 26,000 jobs, and larger companies adding 43,000 workers. 

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.
Federated Global Investment Management Corp.
Copyright © 2014 Federated Investors, Inc.

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