Conditions in the American labor market remain remarkably stable as the pace of hiring slowed in April.
Labor market demand, albeit soft by recent standards, is more than sufficient to keep the unemployment rate from rising as the economy adjusts to a historic supply shock that will soon erase nominal wage gains that is causing household consumption to slow.
An uneasy status quo best described as a low-hire, low-fire labor market remains intact.
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The Bureau of Labor Statistics’ first estimate of the April employment, released on Friday, reported an increase of 115,000 jobs while the unemployment rate remained steady at 4.3%.
While the March estimate was revised up by 10,000, there was a two-month downward revision of 16,000. On a three-month basis, top-line monthly payrolls increased on average of 48,000, or just above our estimate of the 25,000 necessary to keep American labor market conditions stable.
The health care sector added nearly 54,000 jobs in April, which was the primary reason for the above-consensus gain in the top-line figure.
There was an increase of 38,000 positions in couriers and messengers, which was the primary reason for the gain of 60,000 jobs in trade and transport. Such an increase will be hard to sustain and will most likely be revised down in the coming months.
For this reason and others, the 115,000 top-line increase appears to modestly overstate the underlying trend in hiring, which we think is closer to 50,000 per month.
Average hourly earnings on a nominal basis increased by 0.2% in April and were up by 3.6% from a year ago. Any relief taken from this increase will quickly fade as inflation will soon cause inflation-adjusted wage gains to turn negative.
Next week, the BLS will release real average hourly earnings, which will most likely show a flat to negative reading in the April survey and turn negative in the May data because of supply shock-induced inflation.
Decisions on workforce expansion are typically made three to six months in advance of actual hiring. There is scant evidence of hiring in the April report because of the war nor do we expect it to materially show up in the May jobs report.
While early evidence of demand destruction is evident in the spending data, we simply do not expect to observe any adverse impact on hiring to show up until summer if it does at all given the demand for labor amid rapidly changing demographics and tight immigration policies.
Policy implications
The April employment report and the coming inflation data will feed into the open debate inside the Federal Reserve on removing the easing bias from the Federal Open Market Committee’s statement and acknowledge two-sided risks to the economic outlook.
If one looks at an unemployment rate that has averaged 4.3% over the past year (a lower boundary of 4.1% and a higher boundary of 4.5%) one gets a good sense of what maximum sustainable employment looks like.
Arguments made at the end of last year around concern linked to slower employment growth and rising unemployment have faded as broader employment conditions have stabilized.
Under such conditions, given what we expect will result in an increase in the consumer price index to 4.5% and the personal consumption expenditures index close to 4% in the near term, rate cuts are simply not appropriate at this time.
Given the changes to the FOMC statement that we anticipate in June, we simply do not see any material change to the policy path this year.
The data
The April data showed a solid increase of 123,000 in total private hiring driven primarily by a 113,000 increase in service sector employment. Higher-paying goods-producing jobs increased by 10,000, construction added 9,000 while the manufacturing sector shed 2,000 workers.
Trade and transport added 60,000 jobs, the retail trade sector added 22,000 and professional business services added 7,000. There were an additional 46,000 jobs created in private education and health workers, while leisure and hospitality workers saw an increase of 14,000 jobs.
The information sector shed 13,000 jobs and the financial sector reduced headcount by 11,000. Government hiring fell by 8,000.
Average hourly earnings increased by 3.1% on a three-month average annualized basis while total private hours worked ticked up to 34.3, manufacturing hours increased to 40.4 and aggregate hours worked increased to 116.6.
The median duration of unemployment fell to 11 weeks from 11.5. The participation rate eased to 61.8% from 61.9% while the employment ratio dropped to 59.1% from 59.2%. The labor force declined by 92,000.
The takeaway
Solid, steady, and stable is the best description of the American labor market at the current time. While the top-line estimate overstates the true underlying trend, an unemployment rate of 4.3% is a good working definition of maximum sustainable employment.
Under these conditions, it is simply not appropriate for the Federal Reserve to cut its policy rate, and we expect this data to feed into a change in the policy stance at the central bank that will feature a removal in the easing bias in its statement at the June meeting.
Since hiring decisions by businesses tend to be made three to six months in advance, any adverse impact caused by the war and the ensuing supply shock will not show up in the data until the summer.
But in the near term, inflation-adjusted wages downward will have negative growth in the April and May data, which will dampen consumption.
This is why we revised down our GDP forecast for 2026 from 2.4% to 1.7% in April and we continue to expect a modest average of 50,000 jobs added monthly this year with downside risk because of the supply shock working its way through the American economy.
