Reversal of fortunes

Bottom Line

This morning’s surprisingly weaker-than-expected labor market report for April was music to the ears of the Federal Reserve and the White House, as it likely takes the risk of another interest rate hike off the table and enhances the prospect of cuts later this year.

Nonfarm payrolls increased by a much softer-than-expected 175,000 jobs in April (consensus at 240,000, Federated Hermes at 303,000), the smallest gain in six months. Previously reported February and March gains were revised down by a combined 22,000 jobs. The Labor Department today revised February down by 34,000 jobs to a final gain of 236,000, while March was revised up by 12,000 jobs to 315,000, which collectively adjusts this morning’s flash report for April down to a gain of 153,000 jobs.

Private payrolls also rose by a weaker-than-expected 167,000 jobs in April (consensus at 193,000). February and March were revised down by 15,000 jobs, which reduces April’s adjusted gain to 152,000 jobs. The difference between nonfarm and private hiring was a weak gain of only 8,000 government jobs in April, the smallest gain in two years.

More weakness Household employment inched up by only 25,000 jobs in April, down sharply from a gain of 498,000 in March, a 4-month high. Also, the unemployment rate (U-3) ticked up to 3.9%, while the labor participation rate (U-6) leapt to a nearly 3-year high of 7.4%. Moreover, average hourly earnings surprisingly slowed to a month-over-month (m/m) gain of 0.2% and a year-over-year (y/y) increase of 3.9%, its weakest reading in nearly three years. Finally, temporary hiring lost jobs for the third consecutive month and for the 14th time in the last 15 months.

Inconsistent data Part of the problem with this morning’s report, however, is that April’s weak employment picture is inconsistent with recent strength in other data. April’s ADP report, for example, is just off an 8-month high at 192,000 jobs added, while initial weekly jobless claims are sitting at a 3-month low. At the same time, wage inflation surprisingly soared in the first quarter, with unit labor costs surging 4.7% quarter-over-quarter (q/q) annualized and with the employment costs index rising by 1.2% q/q.

How does the Fed parse this divergence? Fed Chair Jay Powell said in his FOMC presser on Wednesday that, while it was unlikely that the next policy move would be a hike, it’s likely to take longer for the Fed to gain confidence the economy is on a sustainable path to its 2% core PCE target. We are still expecting one or rate cuts this year after the election on November 5. So we believe that a patient, data-dependent, wait-and-see approach is appropriate.

Important labor-market indicators were mixed:

• ADP private payroll survey April added a firmer-than-expected 192,000 jobs (consensus at 183,000), modestly below March’s upwardly revised 8-month high of 208,000 jobs. But over the past three months, ADP hiring has accelerated, averaged a strong gain of 192,000 jobs per month, 52% higher than the average of only 126,000 private jobs created over the previous six months. Workers who changed jobs last month saw their wages surge by 9.3% y/y, just below March’s eight-month high of a 10.1% gain. However, job stayers in April experienced their slowest wage growth in 32 months with a modest increase of 5.0% y/y, which was a tick lower than February and March.
• Initial weekly jobless claims This high-frequency leading employment indicator held steady at a 10-week low of only 208,000 last week, marginally below the April survey week of 212,000 claims for the week ended April 13. The smoother 4-week moving average of 210,000 claims is sitting at a 7-week low, and continuing claims of 1.774 million for the week ended April 20 are at a 14-week low.
• Hiring and layoff trends Through April, employers announced the fewest hires in the first four months of the year since 2016 according to Challenger, Gray & Christmas, and last month’s announced hiring plans of only 9,802 workers was the lowest figure for the month of April since 2013. But layoffs have also slowed, as April’s announced layoffs of 64,789 was a 4-month low, down 25% since March and 3.3% lower than a year ago. Automotive layoff announcements of nearly 14,400 workers (22% of total layoffs) dominated this category.
• Job Openings & Labor Turnover Survey (JOLTS) March job openings declined sequentially by a deeper-than-expected 3.7% m/m to their lowest level in more than three years at 8.488 million (consensus at 8.68 million), compared with an upwardly revised 8.813 million in February. That’s 30% below a record 12.182 million job openings in March 2022. The rate of job openings fell to a more than 3-year low of 5.1% in March, after three consecutive months at 5.3%, down from a record 7.4% two years ago. The ratio of job openings for every unemployed worker fell to 1.3 in March after five consecutive months at 1.4, down from a peak of 2.0 in March 2022. The number of voluntary quitters declined nearly 6% to a more than three-year low of 3.329 million in March, and the quits rate slipped to a nearly 4-year low of 2.1%. This suggests that workers are less confident in their ability to switch jobs. This metric peaked at 3.0% in April 2022.
• Quarterly wage inflation soars Unit labor costs surged by the most in a year in the first quarter by a much higher-than-expected 4.7% q/q annualized (consensus at 4.0%), up sharply from a downwardly revised decline to breakeven in the fourth quarter. At the same time, nonfarm productivity plunged in the first quarter to a weaker-than-expected increase of 0.3% q/q annualized (consensus at 0.5%), down significantly from gains of 3.5% and 4.6% in the fourth and third quarter, respectively. In addition, the Employment Cost Index (ECI) leapt by a stronger-than-expected 1.2% q/q in the first quarter (consensus at 1.0%), which was the most in a year, up from a gain of 0.9% in the fourth quarter. This metric annualizes to a gain of 4.2%

Wage inflation and hours worked drop Average hourly earnings rose by weaker-than-expected gains in April of 0.2% m/m and 3.9% y/y, down from 4.1% in March and 4.4% in January. The Fed is targeting a 3% gain. Meanwhile, average weekly hours worked rose by a less-than-expected 34.3 in April versus 34.4 in March. Each change of 0.1 hour worked is the equivalent of subtracting an estimated 350,000 jobs from the economy. This is important, as employers tend to adjust hours before they adjust staff.

Unemployment and labor impairment rates rise, while participation rate steady Household employment (an important leading employment indicator) added only 25,000 jobs in April, down sharply from 498,000 jobs in March, after shedding 184,000 jobs in February, 31,000 jobs in January and a much larger loss of 683,000 jobs in December, its single worst month since April 2020.

The number of unemployed people increased by 63,000 workers in April, compared with a decline of 29,000 in March. So, U-3 ticked up to a higher-than-expected 3.9% in April from 3.8% in March, 3.7% in January and April’s 53-year low of 3.4%. U-6 ticked up to 7.4% in April from 7.3% in March, 7.2% in January, 7.1% in December and 7.0% in November, all well above the cycle low (dating back to 1994) of 6.5% in December 2022.

The civilian labor force grew by 87,000 workers in April, slower than gains of 469,000 jobs in March and 150,000 workers in February and declines of 175,000 in January and 676,000 in December. The labor participation rate was unchanged at 62.7% in April, up from 62.5% in February, but still down from 62.8% in November, which matched a post-pandemic high. The pre-pandemic cycle high was 63.3% in February 2020.

K-shaped recovery widens The rate of unemployment for highly educated workers ticked up to 2.2% in April, compared with September 2022’s cycle low of 1.8%. But the rate of unemployment for less-educated workers rebounded to 6.0% after March’s inexplicable decline to 4.9% in March from 6.1% in February. The 31-year low of 4.4% was in November 2022.

Sector details mixed:

• Temporary help (an important leading employment indicator) lost 16,000 jobs in April for the 14th time out of the past 15 months.
• Manufacturing added 8,000 jobs in April after losses of 4,000 jobs in March and 9,000 in February. The ISM manufacturing index surprisingly declined to 49.2 in April, down from 50.3 in March, as the index’s slipped below the 50 contraction level after a one-month reprieve.
• Construction added 9,000 jobs in April, compared with gains of 40,000 jobs in March, 24,000 in February and 26,000 in January, as housing is starting to slow again as mortgage rates have risen.
• Retail added 20,000 jobs in April, 15,000 jobs in March, and 23,000 in February, as March retail sales rebounded from poor January and February levels.
• Leisure & hospitality rose by a paltry 5,000 jobs in April, after adding 53,000 in March and 26,000 in February, after a loss of 3,000 jobs in January.

Connect with Phil on LinkedIn