A commentary from AXA IM’s Head of Macroeconomic Research, David Page on today’s Jobs report.
- Payrolls rose by 428k, a little firmer than consensus and offsetting the net 39k downward revision to the previous months.
- Unemployment remained at 3.6%, a fall in household employment offset by a drop in the labor supply. We expect unemployment to edge lower in May
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- Earnings growth rose by just 0.3% on the month, but the monthly pace has been volatile and subject to revision – there is no obvious trend deceleration here yet.
- The Fed will require more material signs of labor market easing from here before it relents from aggressive tightening and we argue that is unlikely before July’s hike.
- Yet slower economic activity should be more obvious in the labor market over the coming months and ultimately this will see the Fed ease and stop tightening policy.
April’s Jobs Report
US non-farm payrolls posted a rise of 428k in April, unchanged on a downward revised March (from 431k), with February’s outsized gain scaled a little lower to 714k (from 750k). This was a little firmer than consensus, on the month but broadly in line overall. Despite that, unemployment remained at 3.6% (consensus 3.5%), with underemployment edging a little higher to 7.0%. This was surprising against an unexpected drop in participation in April to 62.2%, unwinding the last two months’ improvement. Earnings growth slowed a little more than expected, rising by just 0.3% in April, although the annual rate came in at 5.5% as expected, with March’s monthly gain revised up to 0.5% (from 0.4%).
April’s 428k rise in payrolls was both higher than the published consensus (380k), but also defied more timely signals from the ADP survey (which fell to 247k from 479k) and employment components of both ISM surveys, which both fell to around 50. Both had suggested a smaller monthly gain in payrolls. There was little variation in the breakdown of payrolls gains: leisure and hospitality gains slowed to rise by just 78k, the smallest monthly gain since 2020 as COVID volatility for this sector faded, but ex-leisure services jobs rose by 260k – a trend consistent with the past 12-months. The household employment survey, by contrast recorded a fall in employment of 353k – the first outright decline recorded since April 2020. Yet this followed a number of months of outsized gains in this series and brought the two measures of employment closer to alignment, at least relative to their pre-COVID level with payrolls now just 1.2m short of the Feb-2020 levels and the household measure 0.8m (in March this had been 1.6m and 0.4m).
Unemployment remained unchanged at 3.6% in April, close to the pre-COVID low of 3.5% and all time lows of 3.4%. The fall in household employment (the measure used for unemployment) weighed, but was offset by a similar fall in labor supply, which fell by 0.2% – its sharpest one-month fall since January 2021. This also coincided with the labor force participation rate falling back to 62.2% from 62.4% last month – defying consensus forecasts for a further small rise. Looking ahead, both factors are likely to reverse next month, the household survey likely resuming gains and labor supply likely recouping much of this month’s drop. On balance we see this edging the unemployment rate lower to 3.5% next month.
Average earnings also came in at the lower end of expectations, the monthly rate rising by just 0.3% (consensus 0.4%), but the annual rate in line at 5.5% as March’s monthly rate was revised higher to 0.5% (from 0.4%). The volatility of the monthly rate (this was just 0.1% in February), and revisions make the trend difficult to read. The average annualized rate of wage growth this year has been 4.6%, likely still too firm to achieve the Fed’s 2% inflation target. However, a 0.3% annualised growth rate of 3.7% should be more consistent with achieving the target over the longer run. For now, wage growth does not seem to be accelerating, but there is only tentative evidence that it is receding.
After a week of significant market moving announcements, today’s report fell into a not-too-hot-not-too-cold camp. For sure, the Fed will require a more material easing in the labor market – and slower pace of payroll growth and there is little in this release to suggest that it is in train. However, nor do these data suggest that the labor market is continuing to tighten materially. The Fed will receive another payrolls report before its next meeting – where it has suggested it will hike by 50bps – and we doubt that report will dissuade them. However, it will receive two more reports before the July meeting where Fed Chair Powell suggested a further 50bps hike was likely. On balance, we see insufficient development to stall that hike either. But we will watch to see whether a broader deceleration in activity, evident in Q1 GDP and a wider range of metrics, begins to more obviously show up in labor market data as we go into the summer. Such a slowdown in the labor market would not only merit a change of gears from the Fed, to 0.25% hikes from 0.50%, but ultimately we believe will necessitate an outright pause to stop efforts to remove excess demand from the system turning into pushing the economy into a more meaningful slowdown.
There was little market reaction to the data, with a little volatility ahead of the release. 2-year government yields were broadly unchanged at 2.73%, although the 10-year yield edged higher by 3bps to 3.14%. The dollar edged higher by 0.1% after the release.