Instant Analysis: Employment report for April

Scott Anderson
Posted by Scott Anderson
Chief Economist

The U.S. labor market finally came out of its shell and showed its head in April and may be turning into a hare in the months ahead.

Young professional woman smiling at a colleagueThe U.S. job market is visibly heating up and tightening up as the second quarter gets underway. Expectations were higher than usual given the strong ADP report and declines in initial jobless claims, but the April jobs report still surprised on the strong side. March and February nonfarm payrolls were also revised higher by a net 36K jobs bringing the average monthly payroll gains over the past three months up to respectable +237K a month pace. These types of monthly payroll gains are more consistent with a GDP growth rate well above 3.5% rather than the Q1 advanced estimate reading of 0.1% we got on Wednesday.

The April payroll numbers were strong enough in my opinion for the Fed to continue on their $10 billion a meeting tapering path with an end to QE3 by the October FOMC meeting. The big drop in the unemployment rate to 6.3 percent is going to trigger more debate about how much additional slack there really is in the labor market and may add to market fears that the taper could be accelerated or Fed rate hikes could start sooner rather than later.

However, the household employment survey was a less ebullient read. Household employment dropped 75K jobs and the labor force contracted a whopping 806K, wiping out the strong labor force gains we had seen in the prior few months and thought was signaling a return of discouraged workers to the labor force.

But the largest disappoint in today’s employment report, in my opinion, was the lack of income growth. Average hourly earnings were flat in April and the year-on-year gains slipped to 1.9 percent. Average weekly hours also held steady at 34.5 hours. Without stronger earnings growth, it will be more difficult for the recent spurt of consumer spending to be maintained in the months ahead and we could continue to see economic growth in fits and starts rather than moving on to a higher sustainable growth path.

Private services payrolls improved again in April. Service employment increases continue to drive the majority of payroll gains: Professional and business services added (+75K), education and health (+40K), retail (+35K) and leisure and hospitality (+28K). Only information services (-3K) and Federal government (-3K) lost net jobs last month.

The goods producing sectors ramped-up their hiring as well. Construction (+32K) and manufacturing (+12K) both added more jobs last month.

Bottom-line, another solid employment report for April that brings the Fed closer to its goals on full-employment. The report fits in nicely with our stronger growth outlook for the second quarter and over the balance of the year. It also matches well with the FOMC’s expectations for the labor market, excluding the sharp unemployment rate drop, and likely means more $10 billion dollar reductions in monthly asset purchases at future FOMC meetings. Market reaction has been tentatively positive to this employment report, stock futures were up four-tenths of a percentage point and the 10-year Treasury yield increased to 2.66 percent.

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