A dynamic U.S. labor market did not disappoint in April as the private sector created 236,000 new jobs and government added 27,000 for a net gain of 263,000 on the month. The monthly report from the Bureau of Labor Statistics saw the unemployment rate decline to 3.6 percent, the lowest level since December 1969. Upward revisions to the previous two months resulted in a total change in employment of 279,000, well above the 169,000 three-month average.
This strong report will likely reinforce the Federal Reserve’s policy path and implies the market got way ahead of itself by pricing in the potential for rate cuts later this year.
Broad-based gains across nearly all categories (save retail and information) reflect payback after an uneven start to hiring through the first three months of the year. Given the slowdown in real private demand, excluding inventories and trade during the first quarter, the robust hiring in April will likely help clear the inventory overhang in manufacturing in general, and the auto sector in particular, despite the moderation in wage growth on the month and on a year-ago basis.
This strong report will likely reinforce the Federal Reserve’s policy path and implies the market got way ahead of itself by pricing in the potential for rate cuts later this year. It also suggests that Fed Chair Jerome Powell’s judgment that the economy neither needs a rate cut nor a rate hike even as economic activity moderates.
Wages have yet to move materially higher as a result robust hiring and a declining unemployment rate, thus the Fed has room to explore the duration of its patience, despite its recent communications challenge, without risk to the economic outlook from wage-induced inflation. Our base case is that there will be no movement in the policy rate until 2021, and today’s jobs data reinforce that forecast.
A half-century low: inside the report
Inside the data, average hourly earnings increased at a 0.2 percent month-over-month pace and are up 3.23 percent on a year-ago basis. Smoothing out the month-to-month volatility, wages increased 3.04 percent on a three-month average hourly basis. Wage moderation since February is of some concern given the strong top line.
Based on newly available data, we do believe that, on the margin, increases in automation and the integration of artificial intelligence into the production of goods and provision of services is damping wage growth. This is a policy problem that the Federal Reserve is not positioned to solve.
Total private hours declined by minus 0.3 percent on the month, while overtime was flat. Aggregate hours declined by minus 0.1 percent on the month. While wage growth and the creation of new jobs should facilitate a clearing of excess inventory accumulation over the past six months, this does require monitoring. If the inventory accumulation is sustained we will need to reexamine our optimistic forecast on consumer spending for the second half of the year.
The labor force participation rate eased to 62.8 percent from 63 percent in March, while the employment to population ratio held steady at 60.6 percent. The median duration of unemployment is 9.4 weeks and there are still 96.2 million individuals not in the labor force.
Employment by category illustrate the strength inside the report. Goods producing jobs advanced by 34,000 and construction jobs increased by 33,000. Manufacturing had its third straight soft month of hiring and added only 4,000 on the month, which is now the three-month average in the series. Of all the categories inside the time series, this, along with retail hiring, which fell by 12,000, is the most concerning given the fact that neither domestic nor global manufacturing have yet to stabilize.
The private service sector added 202,000 on the month driven by high-wage jobs in education and health, business services and financial services.