April jobs report a mixed bag

Bottom Line 

The labor market in April posted a stronger-than-expected nominal gain of 428,000 nonfarm jobs, better than the Bloomberg consensus gain of 380,000 and well above our more conservative forecast here at Federated Hermes for an increase of 265,000. But the Labor Department revised February and March results down by a combined 39,000 jobs, and the household survey lost 353,000 jobs in April, substantially below March’s strong gain of 736,000 jobs. 

The unemployment rate remained 3.6%, the labor impairment rate ticked up to 7% and the participation rate declined to a disappointing 62.2%. Annual wage gains ticked down to 5.5%, but weekly hours worked were unchanged at 34.6 for the third time in the last four months. Industry sector hiring trends also were mixed. While manufacturing rose by a much stronger-than expected 55,000 jobs in April, construction and temporary hiring added only 2,000 workers each, while leisure & hospitality hiring has fallen by half over the past four months.

Broader employment metrics also contained discrepancies. JOLTS hiring hit a new record high at 11.5 million in March. But April’s ADP report disappointed, posting job gains roughly half of March levels. Likewise, initial weekly jobless claims have risen 20% over the past six weeks, and Challenger job cuts in April rose 6% from a year ago and nearly 14% from March. 

Fed gets aggressive Despite the decidedly mixed picture in the labor market, the Federal Reserve followed through with a well-telegraphed half-point hike of the fed funds target range on Wednesday, its first increase of that magnitude in 22 years. That move comes on the heels of a quarter-point rate hike (its first of any kind in four years) at its policy meeting in March. But with inflation still running at a 40-year high, we expect policymakers to execute another pair of half-point rate hikes at the June 15 and July 27 Federal Open Market Committee meetings. If the Fed can help to orchestrate an inflationary peak over the summer, it could take a victory lap at the Jackson Hole annual monetary policy symposium in late August. 

The FOMC also announced the Fed will begin to shrink its bloated $9 trillion balance sheet next month by letting securities roll off at a pace of $47.5 billion in each of June, July and August ($30 billion in Treasuries and $17.5 billion in mortgage-backed securities, or MBS). Starting in September, the Fed will accelerate that pace to $95 billion monthly ($60 billion in Treasuries and $35 billion in MBS). The plan is to cut the balance sheet by a third over the next three years. 

Financial markets volatile The S&P 500 rallied more than 3% after the Fed’s announcement on Wednesday afternoon, as investors were initially encouraged by Chair Jerome Powell’s comment during his presser that a 75-basis-point hike likely was off the table. But stocks have plunged more than 5% over the past two days as investors now more soberly realize that the fed funds rate could be at 3.5% by the end of next year. So, will the Fed successfully stick a soft landing, or will stagflation morph into recession in coming years? That fear has driven stocks down by more than 15% thus far this year, and benchmark 10-year Treasury yields have more than doubled from 1.50% at the beginning of the year to a nearly four-year high of 3.12% today.

Unemployment flat, labor impairment rises, participation rate falls The household survey plunged into negative territory for the first time in 10 months in April, declining by 353,000 jobs, compared with a strong gain of 736,000 jobs in March. The number of unemployed people fell by only 11,000 in April (versus a decline of 318,000 in March). As a result, the unemployment rate (U-3) was unchanged at a cycle low of 3.6% in April, and the labor impairment rate (U-6) ticked up to 7% in April. The civilian labor force fell by 363,000 people in April, compared with an increase of 418,000 people in March, which drove the participation rate down to 62.2% in April, versus March’s cycle high of 62.4%. 

Other labor market metrics mixed The lagging Job Openings & Labor Turnover Survey (JOLTS) rose to a much stronger-than-expected record high of 11.55 million open jobs in March, and there are now a record 1.9 job openings for every unemployed worker. Voluntary quits rose to a record 4.5 million workers, with a record quits rate of 3%. But the ADP private payroll survey was a huge disappointment, rising a much weaker-than-expected 247,000 jobs in April (consensus at 383,000), while March was revised higher to a gain of 479,000. Small companies, which are the engine of employment growth in the U.S. economy, lost 120,000 in April. After hitting a trough at a more than half-century cycle low of only 166,000 initial weekly jobless claims for the week ended March 19, claims have risen 20% in the last six weeks to 200,000 on April 30. Less noisy continuing claims are still at a cycle low of 1.384 million for the week ended April 23. Finally, Challenger job cuts rose sequentially by 13.6% to 24,000 in April, which is also a 6% year-over-year (y/y) increase.

Sector details mixed The manufacturing sector added a much stronger-than-expected 55,000 jobs in April (consensus at 35,000), up from 43,000 hires in March. But construction added only 2,000 new jobs in April, down sharply from 20,000 jobs in March and 54,000 workers in February, as housing has slowed due to higher mortgage rates and home prices. With robust Christmas sales (up 16.4% y/y) behind us, retail hiring has slowed noticeably, adding only 29,000 new jobs in April, versus 25,000 jobs in March, 111,000 jobs in February and 121,000 in January. Temporary hiring, which is a leading indicator of employment trends, added only 2,000 jobs in April, compared with 1,000 jobs in March and 28,000 in February. Leisure & hospitality added only 78,000 jobs in April, down from 100,000 in March, 124,000 in February, 138,000 in January, 186,000 in December and 191,000 in November. 

K-shaped recovery stumbles The unemployment rate for high-earning workers remained at 2% in April, but it rose for low-earning workers, increasing to 5.4% in April from 5.2% in March and a 30-year low of 4.3% in February.