'Sizzling' labor market report less impressive than it seems
Barring the emergence of more bullish data, we expect the Fed to pause rate hikes this year.
The April employment report seems hotter than a tamale on Cinco de Mayo. Nonfarm payrolls surged by a tremendous 253,000 jobs, the unemployment rate retested a 53-year low of 3.4% and average hourly earnings leapt to a 9-month high of 0.5% month-over-month (m/m), which annualizes to a 6% run rate. When you take a bite, though, it’s decidedly less fiery.
To be sure, the gain greatly exceeded the consensus expectation for 185,000 added jobs and our own forecast at Federated Hermes for 175,000. But because the Bureau of Labor Statistics revised February and March down a combined—and massive—149,000 jobs, April’s increase becomes a more pedestrian 104,000.
Furthermore, household employment rose by only 139,000 jobs in April, a 75% drop from the 577,000 added in March. Average weekly hours worked have slipped over the past three months to 34.4 (employers typically cut hours before jobs). The temporary help category has lost jobs three months in a row and five times in the past six months. And leisure and hospitality hiring has slowed nearly 70% over the last three months (driving the unemployment rate for low wage-earning workers up to 5.4% from 4.8% in March). Lastly, job openings plummeted to a 2-year low in March, Challenger job cuts continue to soar (particularly in technology) and initial weekly jobless claims recently hit a 6-week high, rising 21% since mid-January. Not so hot.
What will the Fed do in June? On Wednesday, the Federal Reserve hiked the fed funds rate for the 10th consecutive meeting. This time it was a quarter percentage point, putting the target range at 5-5.25%. Chair Jerome Powell will receive another jobs report on June 2 before its next policy-setting meeting on June 14, which may help to clarify some of the cross currents in this one.
Our best guess right now is that a pause may be in order, one in which the Fed keeps rates in their current range until next year. But a truly sizzling jobs report next month could keep the Fed engaged, likely another 0.25% hike. We disagree with consensus optimism that the Fed will orchestrate four consecutive rate cuts to finish the year. Further complicating matters is the continued banking stress. It likely will tighten bank-lending standards and loan volumes, which probably adds another 50-75 basis points of quasi-tightening to the discussion.
Other labor market indicators mixed:
- The ADP private payroll survey for April soared by a stronger-than-expected 296,000 jobs, roughly double consensus expectations for a gain of 150,000 jobs and March’s downwardly revised increase of 142,000 jobs. April’s surprising surge in private payrolls is consistent with the gain in nonfarm payrolls. Also, wage growth soared by 6.7% year-over-year (y/y) last month for job stayers and by 13.2% for those who changed jobs.
- Lagging Job Openings & Labor Turnover Survey (JOLTS) surprisingly declined by 4% m/m in March to a two-year low of 9.6 million job openings, and down by 20% from a record 12 million job openings in March 2022. There are now 1.6 job openings for every unemployed worker, and 3.9 million voluntary quitters slipped to a 2-year low of 2.5%.
- Challenger job cuts rose in April by another 67,000 layoffs, up 176% from a year ago, although down 25% from March. Technology (27,600) and financial (10,700) layoffs account for 57% of the terminations.
- Initial weekly jobless claims hit a six-week high of 242,000 for the week ended April 29, up 21% since mid-January.
Wage inflation rises, but hours worked flat Average hourly earnings leapt by a 9-month high of 0.5% m/m in April, up from a 0.3% gain in each of the previous three months, which annualizes to a white-hot 6% gain. Wages rose by 4.2% y/y in April, up a tick from 4.3% in March. In addition, average hours worked were unchanged for the second consecutive month at 34.4 in April, down from 34.5 in February and 34.6 in January. Each change of 0.1 hour worked is the equivalent of adding or subtracting an estimated 350,000 jobs to or from the economy.
Unemployment and labor impairment rates fall, participation rate flat Household employment rose by 139,000 jobs in April, but that’s a 75% decline from March’s powerful gain of 577,000 jobs. The number of unemployed people fell by 182,000 in April, compared with a decline of 97,000 in March, marking declines for the eighth time in the last 11 months. The official unemployment rate (U-3) ticked down to 3.4% in April, which matches January’s 53-year low last set in May 1969. But the Fed’s own forecast from its March Summary of Economic Projections (SEP) is that the unemployment rate will rise to 4.5% by year-end 2023, an increase which could push the economy into a mild recession next year.
The labor impairment rate (U-6) also slipped a tick to 6.6% in April, just above a cycle low (dating back to 1994) of 6.5% in December. But the civilian labor force fell by 43,000 workers in April, versus a strong gain of 480,000 workers in March. That left the participation rate unchanged at 62.6% in April, compared to the pre-pandemic cycle high of 63.4% in February 2020.
K-shaped recovery widens The rate of unemployment for high-wage-earning workers slipped to 1.9% in April, down from 2.0% in March and just above September 2022’s cycle low of 1.8%. But the unemployment rate for low-wage-earning employees soared from 4.8% in March to 5.4% in April (versus its 30-year low of 4.3% in February 2022). The personal savings rate has risen from a 17-year low of 2.7% in June 2022 to 5.1% in March (down sharply from 26.3% in March 2021). So consumers are tightening their purse strings, resulting in a slowdown in leisure & hospitality hiring.
Sector details mixed:
- Private payrolls similarly posted a stronger-than-expected gain of 230,000 jobs in April (consensus at 160,000), but February and March combined were revised down by 139,000 jobs.
- Government hiring rose by 23,000 jobs in April (17,000 of which was local hiring), down from 42,000 jobs in March, 55,000 in February and 119,000 in January.
- The manufacturing sector gained a stronger-than-expected 11,000 jobs in April (consensus was a loss of 5,000 jobs), compared with a loss of 8,000 jobs in March and gains 3,000 jobs in February and 11,000 in January. The ISM manufacturing index has fallen into contraction territory under 50 in each of the past six months to 47.1 in April.
- Construction added 15,000 in April, versus a loss of 11,000 jobs in March and gains of 14,000 in February and 26,000 in both January and December. Mortgage rates more than doubled from 3% to 7.35% over the past year, which slowed the housing market significantly. But they have recently fallen back toward 6%, and the housing market has rebounded.
- Temporary hiring (an important leading indicator of employment trends) lost 23,000 jobs in April for the third consecutive month and for the fifth time in the past six months. That compares with losses of 19,000 jobs in March and 10,000 in February.
- Retailers added 8,000 jobs in April after losing 20,000 jobs at the start of the important spring “Mapril” season in March. That compared with gains of 48,000 in February, 22,000 in January and 27,000 in December.
- Leisure & hospitality added only 31,000 jobs in April, down from 40,000 workers in March, 57,000 in February and 99,000 in January.