Orlando's Outlook: Labor market redemption

05-05-2017

Bottom line The labor market in April enjoyed a powerful snapback from weather-impaired March levels, alleviating investor concerns about underlying economic weakness and keeping the Federal Reserve on track to hike interest rates in mid-June. Nonfarm payrolls rose by a stronger-than-expected 211,000 jobs last month, a significant rebound from the downwardly revised 79,000 new jobs in March. Winter storm Stella’s unfortunate presence during the March survey week sharply reduced that month’s job count. In addition, the unemployment rate (U-3) and underemployment rate (U-6) fell to near-decade lows of 4.4% and 8.6%, respectively. So with Cinco de Mayo today and the Kentucky Derby tomorrow, we expect that silly hats will be in abundance, with margaritas and mint juleps flowing freely.

We’ve seen this movie before, we know how it ends The Wall Street Journal reported today that over the past five years, there have been six instances in which monthly nonfarm payrolls disappointed with a gain of less than 100,000 jobs but then rebounded to trend-line growth levels the next month.

Strong jobs snapback April nonfarm payrolls added 211,000 jobs, well above the Bloomberg consensus of 190,000 and our own more optimistic 200,000 estimate here at Federated. The Bureau of Labor Statistics (BLS) revised February and March slightly lower by a combined 6,000 jobs. February’s preliminary gain of 235,000, which was revised down to 219,000 last month, was revised back up to a final reading of 232,000 this morning. March’s preliminary report of a disappointing 98,000 jobs was revised down further to a meager gain of only 79,000 this morning. Given January’s final gain of 216,000, March’s weather-impaired aberration was the clear outlier so far this year.

Private payrolls strong, too Private businesses added 194,000 jobs in April, just above the Bloomberg consensus of 190,000. The BLS revised February and March lower by a combined 11,000. February’s preliminary gain of 227,000 jobs, which was revised down to 221,000 last month, was revised back up to a final gain of 222,000 this morning. But March’s preliminary reading of the addition of only 89,000 jobs was revised down to a gain of 77,000 this morning. In contrast, January posted a final gain of 204,000. So the 3-month average from January, February and April of nearly 207,000 private jobs is almost triple March’s pathetic bump.

Government hiring rises again The amount of government positions filled is the difference between private and nonfarm payrolls, which amounted to 17,000 federal, state and local government jobs, collectively, in April. That compares with smaller gains of only 2,000 in March, 10,000 in February and 12,000 in January. In April, the feds cut 6,000 jobs, local governments added 23,000 and state hiring was unchanged.

Pace of household hiring slows The admittedly volatile household survey added only 156,000 jobs in April, down from much stronger gains of 472,000 in March and 447,000 in February. Because the household survey is a leading indicator for nonfarm and private payrolls, April’s more modest gain raises an eyebrow about future payroll gains in May and beyond. It also serves as the basis for the official unemployment rate.

Unemployment and labor-impairment rates fall, but participation rate rises The civilian labor force rose by only 12,000 workers in April, compared with much stronger gains of 145,000 workers in March, 340,000 in February, 76,000 in January and 184,000 in December. That modest month-over-month (m/m) increase—in conjunction with a more robust gain of 156,000 jobs in the household survey—caused the unemployment rate, which is calculated from the household survey, to drop to 4.4% in April (its lowest level since May 2007), down from 4.5% in March and from 4.7% in February. The labor-impairment rate (U-6)—also known as the “total” rate of unemployment (or the underemployment rate) because it more broadly includes discouraged workers and the underemployed—declined sharply again to 8.6% in April (its lowest level since November 2007), down from 8.9% in March, 9.2% in February and 9.4% in January. The only blemish here is the labor-force participation rate, which slipped to 62.9% in April from its 2-year high of 63% in March. In contrast, its 38-year cycle low of 62.4% was set in October 2014.

Hours worked improve, but wage growth slips The average private work week for all employees moved up a tick to 34.4 hours in April from 34.3 hours in both March and February, which had matched a 2-year low. An increase of 0.1 hour worked is the equivalent of adding an estimated 350,000 or more jobs to the economy. Hourly wages leapt 0.3% m/m in April versus a downwardly revised gain of 0.1% in March and a 0.3% increase in February. But on a year-over-year (y/y) basis, wages increased only 2.5% in April (the weakest reading since August 2016), compared with a downwardly revised gain of 2.6% in March, February’s increase of 2.8% and December’s 8-year cycle-high gain of 2.9%.

Construction improves, manufacturing slows With Stella behind us, construction hiring improved in April to a modest gain of 5,000 jobs, up from a downwardly revised gain of only 1,000 in March (originally reported as a gain of 6,000), but still down sharply from 54,000 (originally reported as a gain of 59,000) in an unseasonably-warm February, the largest gain since March 2007. Manufacturing added only 6,000 new jobs in April, down from 13,000 in March and 22,000 in February (a 3-year high). The ISM manufacturing index slowed to 54.8 in April from a 2-year high of 57.7 in February, so this hiring slippage was expected.

Modest retail rebound Retail added 6,000 jobs in April, after losing 27,000 in March and 29,000 in February (its worst performance since December 2012), compared with a gain of 35,000 jobs in January. That coincides with poor retail-sales results in February and March, particularly in autos, but a good January. We’re expecting better April results next week, which may account for the modest rebound in sector hiring last month.

Temps still positive With modest gains of 6,000 jobs in April, 13,000 in March, 10,000 in February and 15,000 in January, temps—an important leading indicator of employment growth—are in a positive trend that is encouraging for May.

Leisure leaps This economically sensitive category enjoyed a powerful rebound in April with 55,000 new jobs, up sharply from only 9,000 in March, 33,000 in February and 15,000 in January. April also exceeded June 2016’s robust addition of 53,000 new jobs, which bodes well for an improvement in economic growth.

Education & health care rebound In April these categories added 41,000 new jobs, a significant gain from March’s 10,000, but still down sharply from February’s addition of 66,000. January added only 17,000 jobs, but December 2016 added 50,000, which suggests that we’re seeing an uncharacteristically volatile performance from this category over the past five months.

Jobless claims trend lower For the week ended April 29, initial weekly unemployment claims (a leading economic and employment indicator) fell to 238,000, near the 44-year cycle low of only 227,000 set in February. New claims in the April survey week that ended April 15 hit 243,000, much improved over March’s Stella-impacted reading of 261,000.

ADP comes back to earth The ADP National Employment Report, a forward-looking proxy for private payroll growth, added 177,000 jobs in April, the first time in five months that the ADP report came in below 200,000 hires, versus a downwardly-revised 255,000 in March. Business services grew by 72,000 jobs, the highest amount in three years. Small firms with fewer than 50 employees added 61,000 jobs (35% of total, compared with March’s downwardly revised 117,000, or 46% of its total); midsized companies with 50 to 500 employees added 78,000 jobs (44% of total, compared with March’s downwardly revised 96,000, or 38%); and larger companies with more than 500 employees hired 38,000 (22% of total, compared with March’s downwardly revised 42,000, or 17%).

JOLTS rise again The Job Openings and Labor Turnover Survey (JOLTS) measures labor-market dynamics such as resignations, help-wanted ads and the pace of hiring (with a one-month lag) to provide some context to general employment trends. Job openings rose to a 7-month high of 5.743 million in February (the most recent data available) versus 5.63 million in January. The hiring and quits rates edged down, to 3.6% and 2.1%, respectively, while the layoff rate remained at 1.1%. These figures reflect two ongoing trends in the labor market: worker confidence about changing jobs and employer difficulty in identifying applicants with the right skills. As a result, the spread between openings and hirings remains wide at 429,000.

Challenger job cuts fall The April jobs-cut data at 36,600 from Challenger, Gray & Christmas saw a 15% m/m decline and a 43% y/y plunge, with retail the largest layoff casualty.