Not A Dent

Scott Anderson
Chief Economist
Bank of the West

The April Employment Report was a thing of beauty, a demonstration of the resilience of the U.S. labor market, unless of course your goal is to cool down an overheated labor market and bring inflation back down to your 2.0% target. The U.S. economy created a better than expected 253k jobs in April – about 68 thousand jobs more than the consensus forecast. Private services led the way, adding +197k or 86% of those jobs. Though job creation improved last month for goods producers too, including construction and manufacturing jobs.

A Spring Rebound In Jobs
But the biggest surprise, and the statistic that will linger in my mind and the minds of the FOMC participants, was the drop in the U.S. unemployment rate to a new postpandemic low of 3.394% - the lowest unemployment rate since 1969. I feel like I am starting to sound like a broken record, but the U.S. unemployment rate is now more than two-tenths below its 3.6% level when the Fed started hiking interest rates aggressively more than a year ago. With this week’s FOMC rate increase, the cumulative Fed rate hikes of 500 basis points have done virtually nothing to slacken the labor market so far. The number of Americans classified as unemployed actually fell by 315k since the Fed started hiking rates to 5.657 million, while the number of net new jobs has soared by over 4.2 million over that time.

Number of Unemployed Keeps Going Down
Economists had been forecasting an increase in the unemployment rate to 3.6% as job growth slows and layoffs pile-up. Yet despite widespread tech layoffs and rising market fears of imminent recession due to Federal Reserve rate hikes and tightening bank credit, the April Employment Report showed very few signs of distress.

The discussions and information contained in this document are the opinions of the author should not be construed or used as a specific recommendation for the investment of assets, and is not intended as an offer, or a solicitation of an offer, to purchase or sell any security or financial instrument. Nor does the information constitute advice or an expression of the Bank’s view as to whether a particular security or financial instrument is appropriate for you or meets your financial objectives. Economic and market observations and forecasts, such as those offered by Bank of the West Economics reflect subjective judgments and assumptions, and unexpected events may occur. There can be no assurance that developments will transpire as forecasted. Nothing in this document should be interpreted to state or imply that past results are an indication of future performance. More evidence of lingering labor market tightness came from another robust reading on average hourly earnings growth. Average hourly earnings increased 0.5% in April, breaking a three month string of more moderate 0.3% increases. This pushed average hourly earnings growth from a year ago back up to 4.4% from 4.3% in March.

Wage Growth Remains Intense
In short, strong wage growth remains an important support for continued consumer spending and economic growth, but is also an important road-block in the Fed’s efforts to bring inflation back down to earth. While such data may cool fears of near-term recession, they also fly in the face of current market pricing, which still has about 75 basis points in Fed rate cuts before the end of this year priced-in. The more stubborn the resilience in job and wage gains, the longer the Fed will need to remain in a restrictive monetary stance, and the bigger the chance of an economic downturn at some point this year. Job growth remained widespread across industries in April, another sign of resilience. Job growth accelerated for Education and Health Care (+77k), Professional and Business Services (+43k), Financial Services (+23k), Construction (+15k), Manufacturing (+11k) and Retail Trade (+8k), slowed in Leisure & Hospitality (+31k), Government (+23k), Information (+1k), and declined in Temporary Help (-23k).

Solid Net Job Creation Continues Across Most Industries
So as you can see, it is an all-around solid report on the state of the U.S. labor market in April. But there are a few caveats to mention. First, job growth wasn’t as strong as we thought in February and March, leading to a net downward revision of 147k jobs, so after incorporating this downward revision, total nonfarm payrolls in April only increased by 104k. Second, labor force growth stalled last month, declining by 43k with 214k more people classifying themselves as not in the labor forces. At the same time, the average duration of unemployment and median duration of unemployment increased to 20.9 weeks and 8.4 weeks respectively from 19.5 and 8.1 weeks. Declining labor force growth and rising unemployment duration are often correlated with a weakening labor market, but it will take more than a one month trend of deterioration here to come to any firm conclusions about the relative strength of the labor market. Third, while volatile month-to-month, employment growth from the Household Survey downshifted sharply to +139k in April from +577k in March, so there is a possibility that nonfarm payrolls could be overstating the labor market resilience last month. Bottom-line, now that the May FOMC decision and April jobs report are behind us, the markets will likely turn their attention squarely on the implication of the debt-ceiling deadline and bank credit tightening on the economic and inflation outlook. Next week also brings a fresh view of U.S. inflation with the release of the April CPI and PPI reports. We are expecting an acceleration in headline inflation from the March pace for both measures.

To learn more, check out this week's U.S. Outlook Report.


[Contributors Section]