An easing of commercial restrictions, mass vaccinations and pent-up demand racing ahead of the overall reopening of the economy bolstered hiring in April to the tune of 266,000 jobs as the unemployment rate increased to 6.1%, according to government data released Friday.
The pandemic recession was not a typical one, and this is not going to be a typical recovery and expansion.
While this report is disappointing compared to the consensus expectation of one million jobs, it would under traditional conditions be celebrated as a strong report, with 1,036,000 jobs added to total employment over the past two months. Yet the pandemic-induced recession was not a garden-variety recession, and this is not going to be a garden-variety recovery and expansion.
So where was the big miss? It almost surely was in leisure and hospitality hiring, which advanced by 331,000 jobs in April following a 206,000 increase in March and 413,000 in February.
Our baseline forecast had roughly 750,000 leisure and hospitality workers streaming back into the workforce. We expect large gains over the next several months in the service sector in general and the leisure and hospitality category in particular.
In addition, there was a decline of 111,000 in temporary workers, a loss of 79,000 in business services and no gain in construction, all of which one does not usually observe early in recoveries.
There were most likely seasonal issues at play—how does one make seasonal adjustments one year after the economy shed 22.6 million jobs during a 60-day period? So some noise in the data should be expected, but that is no excuse for the miss on the part of the economic forecasting community.
Nevertheless, we expect the April report to be revised higher and robust hiring through the remainder of the year.
The wage data in the report does not suggest a sustained increase in inflation.
What will be of paramount interest from this report is the takeaway on the inflation front. We have made the case that without wage-push inflation, there will not be a major deviation from the long-term trend in pricing despite frictions coming out of the pandemic.
Average hourly earnings increased 0.3% on a year-ago basis, which is down from a 4.2% gain last month and the recent peak of 5.5% posted in December.
As more lower-paid workers in leisure and hospitality return to the workforce, one should expect that number to be quite noisy, trend downward as it did in April and even turn negative during some months over the next year.
To account for this noise, we will look at the three-month average annualized pace in wage gains, which stand at 3.1%, down from 3.8% last month and 5.5% in February.
The wage data and the employment cost index, which the central bank uses to make policy, indicate that wages are up 2.6% overall and 3% for private-industry workers. All of that data is not consistent with the idea that wage-push costs will result in a sustained increase in the price level across the economy, which is our working definition of inflation.
Policy takeaway
The major policy takeaway from this report is that, despite the forecasting miss on hiring gains, there are enough early wins that the fiscal and monetary policy authorities still have sufficient policy space to follow though until full employment has been reached.
In fact, the major irony of this report is that the top line missed expectations to such a large degree that it probably increases the case for sustaining policy accommodation and the need for infrastructure spending.
The pandemic recession was unlike any other in the postwar era and the recovery should be expected to be different, too. The integration of fiscal and monetary policies needs to be sustained well past the point that the economy returns to pre-pandemic levels, and be maintained until the pre-crisis level of 3.5% unemployment is in sight.
The fiscal austerity imposed after the great financial crisis, which left the monetary authority isolated, should be avoided. In addition, the Fed needs to avoid a premature tightening of policy in light of what we agree is likely to be transitory pricing pressures, frictions and temporary employment mismatches in the labor market.
Most important, the central bank needs to avoid the same error made in July 2008 by the European Central Bank, which lifted rates as the price of Brent crude soared to $146.08 as the global economy decelerated into the deepest economic funk since the 1930s.
Detail in the report
Beneath the headline employment number, private sector jobs increased by 218,000 and government jobs advanced by 48,000. The goods-producing sector lost 16,000 jobs, with no change in construction. The manufacturing sector contracted by 18,000 jobs.
Private-sector service jobs increased by 234,000. Gains in that category were driven by the 331,000-job increase in leisure and hospitality, 19,000 in the financial sector and 1,000 in information. Job losses in the private sector were driven by the 111,000-job decline in temporary workers, 81,000 in trade and transport, 15,000 in retail trade and 79,000 in business services.
The labor force participation rate increased to 61.7% from 61.5%, and the population-to-employment ratio advanced to 57.9% from 57.8%. The labor force increased by 328,000 in the household survey, which is a statistically insignificant increase. The total labor force stands at a little more than 151 million jobs, down from the December 2019 peak of nearly 159 million positions, leaving the economy 7.5 million jobs short of the pre-pandemic peak.
One year ago
Despite the 1.8 million new jobs generated by the economy to kick off the year, we would be remiss if we did not acknowledge what happened in March and April last year, when 22.36 million jobs were lost. Those losses will result in residual economic and labor market scarring well past the point when the nascent recovery turns into a full-blown economic expansion, and they are one of the reasons behind our policy outlook.
It is clear that roughly a third of the small firms that were open before the pandemic are not likely to return, and that there will be permanent job losses that will endure even as the economy benefits from the strongest year of growth since 1983. It will take some time for the Bureau of Labor Statistics to work though the seasonal-adjustment challenges that are likely in the data.
For more information on how the coronavirus pandemic is affecting midsize businesses, please visit the RSM Coronavirus Resource Center.
