Orlando's Outlook: Mixed signals
Bottom line On the surface, this morning’s Labor Department report for April looks like a blowout, with the largest boost to nonfarm payrolls in more than two years, capping a powerful snapback from the brutal winter. But as we peel back the layers from this proverbial onion, the strong headline payroll gain is offset by a host of other less-than-stellar metrics: flat wages and hours worked, a sharp decline of more than 800,000 jobs in the labor force and a plummeting labor-force participation rate back to a 36-year cycle low. Consequently, the plunge in the rate of unemployment (U-3) from 6.7% to 6.3% is for the wrong reasons—an increase in discouraged workers among the less skilled, after their extended unemployment benefits expired.
In our view, today’s report will not dissuade the Federal Reserve from its current monetary policy path. The Fed recently announced its fourth $10-billion reduction in QE at its Federal Open Market Committee meeting last Wednesday, and we still expect it to complete tapering by the end of the calendar year. Moreover, we continue to expect the federal funds rate to remain at its current zero to 25 basis point range into the middle of calendar 2015.
Nonfarm payroll growth back on track April surged to a healthy gain of 288,000 jobs—the strongest pace since January 2012—well above Bloomberg consensus estimates for a gain of 218,000 jobs and our own more aggressive forecast here at Federated of 233,000. In addition, the Bureau of Labor Statistics (BLS) revised February and March higher by a combined 36,000 jobs. February’s preliminary increase of 175,000 jobs, which was revised up to a gain of 197,000 last month, was revised up to a final gain of 222,000 jobs this morning. March’s preliminary increase of 192,000 jobs was revised up moderately to a gain of 203,000. So the 3-month average gain of almost 238,000 new jobs in February, March and April is nearly triple December’s hugely disappointing, weather-impaired final gain of only 84,000 jobs. Importantly, this healthy recent pace now exceeds the nearly 222,000 job average generated over the 4-month period from August through November 2013. So job creation appears to be back on track, having successfully hurdled an extreme winter-weather speed bump.
Private payrolls enjoy similar bounce April also posted a strong 273,000 jobs, which was well above the Bloomberg consensus forecast for a gain of 215,000 private jobs, and the BLS added 23,000 net positive revisions in February and March. February’s preliminary gain of 162,000 jobs, which was revised up to an increase of 188,000 last month, was revised up to a final gain of 201,000 jobs this morning. March’s preliminary gain of 192,000 jobs was revised up slightly to a gain of 202,000. Compared with December’s weak final gain of only 86,000 new jobs, the 3-month average gain of about 225,000 jobs from February through April is more than double that weather-impacted cycle trough, and it is now outpacing the 4-month average gain of 216,000 jobs from August through November 2013.
ADP leads the way The bounce in this forward-looking proxy for private payroll growth foretold the developing snapback we’re now enjoying in nonfarm and private payrolls. The ADP survey added a stronger-than-expected 220,000 jobs in April (versus a Bloomberg consensus of 210,000), while March was revised up from 191,000 jobs to 209,000, and February was revised up from a gain of 178,000 jobs to a final gain of 193,000. So that 3-month average gain of 207,000 jobs is well above January’s weather-impaired final trough of 121,000 jobs, and it is approaching the slightly more robust 3-month average of 211,000 jobs during October through December 2013.
ADP also reported that in April, small firms (with less than 50 employees) added 82,000 jobs (37% of the total); mid-sized companies (between 50 and 500 employees) added 81,000 jobs (37%); and larger companies (with more than 500 employees) added 57,000 workers (26%). Because the BLS takes a month or longer to identify new employees from small- and mid-sized companies compared with larger companies, that inherent time lag contributes to the leading-indicator nature of the ADP report. In fact, three-quarters of April’s ADP job gains came from these smaller companies, which augurs well for continued job-creation progress into the spring.
Initial weekly jobless claims hit seven-year low Initial weekly jobless claims—another important leading employment indicator—fell to 301,000 for the week ended April 5, 2014, a 7-year low. The following week—which was the all-important “survey week” for the April jobs report—claims edged up to 305,000, with the smoother 4-week moving average falling to 312,000, resulting in this morning’s strong payroll report. More recently, claims spiked to 344,000 for the week ended April 26, but we believe that increase was distorted by the rotating nature of the Passover and Easter holidays and spring breaks from school.
Household employment plunges In one of the lowlights of this report, the admittedly volatile household survey actually lost 73,000 jobs in April, compared with a gain of 476,000 jobs in March, for a negative month-over-month swing of 549,000 workers. We had expected an improvement due to more seasonal weather and better economic growth. This is clearly a concern, as the household survey is also an important leading indicator for nonfarm and private payrolls.
Construction rebound As the brutal winter weather fades, construction gets stronger, adding 32,000 jobs in April, 17,000 new jobs in March and an upwardly revised 24,000 jobs in February, after soaring by 51,000 jobs in January (6-year cycle high). In the depths of the winter, construction had lost 20,000 jobs in December. When housing eventually begins to strengthen in the spring, construction should follow.
Manufacturing revised higher As we had expected, manufacturing hiring trends are starting to align themselves better with the underlying strength of the sector. April added 12,000 jobs, as well as an upwardly revised 7,000 jobs in March and 20,000 jobs in February. The ISM manufacturing index hit a 2014 high of 54.9 in April, and auto production is sitting just off a 7-year high of 16.0 million annualized units in April.
Retail rebound After the weakest Christmas in four years, retail sales bounced in March to their biggest gain since September 2012, on the heels of a strong February, to boot. Consequently, retailers added 35,000 new jobs in April and an upwardly revised 25,000 retail jobs in March, compared with losses of 6,000 jobs in February and 22,000 jobs in January. We expect as the weather gets warmer, retailers will add seasonal workers to their home-and-garden departments.
Temps steady as a rock Temporary help—another important leading indicator of employment growth—grew by 24,000 jobs in April and 25,000 jobs in each of March and February, compared with a gain of only 8,000 jobs in January. But temps had added 32,000 jobs in December and 37,000 in November, so the better weather and the stronger economy should keep this trend in place.
Education & health remain strong This category is building considerable momentum, as education and health services added 40,000 jobs in April, 37,000 jobs in March, 32,000 jobs in February, 16,000 jobs in January and 5,000 jobs in December 2013.
Leisure steady Leisure added 28,000 new jobs in April, on the heels of upwardly revised gains of 34,000 new jobs in March and 35,000 in February, after adding 25,000 jobs in January and 18,000 in December.
Local hiring salvages government The difference between private and nonfarm payroll gains in April resulted in the addition of 15,000 federal, state and local government jobs last month, compared with gains of only 1,000 workers in March and 22,000 new workers in February, and losses of 22,000 in January and 2,000 jobs in December. But the strength in April was all due to state and local government hiring, which is nearly seven times larger than the federal government. Locals added 17,000 jobs last month, while the states added 1,000 jobs and the federal government lost 3,000 jobs, mostly in defense.
Unemployment, labor impairment and participation rates all fall The unemployment rate (U3) plunged to 6.3% in April, its lowest level since September 2008, down sharply from 6.7% in March. The number of unemployed fell by 733,000. Combined with a loss of 73,000 jobs in the household survey, the total labor force fell sharply by 806,000. Our research friends at UBS believe that the expiration of long-term unemployment benefits is the most likely reason behind the huge drop in the labor force, suggesting that many of those people who have been receiving government benefits over the past several years had no intention of returning to the labor force. Once their checks ran out, they officially dropped out of the labor force, which drove the U3, U6 and participation rates lower. The labor impairment rate (U6)—also known as the “total” rate of unemployment, or the underemployment rate, because it more broadly includes discouraged workers and the underemployed—fell to 12.3% in April from 12.7% in March. The labor-force participation rate plummeted from a 7-month high of 63.2% in March to a 36-year cycle low of 62.8% in April.
Wages and hours worked stagnant In one of the more disappointing aspects of today’s report, average hourly earnings were surprisingly unchanged in April, down from a modest 0.1% increase in March. Year-over-year wages rose by 1.9% in April, versus a 2.1% increase in March. The average private work week for all employees was flat at 34.5 hours in April. That’s important, because a change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy.