Labor Market Conditions Remain Broadly Tight; April Miss Ups Rate Cut Optimism

This morning, nonfarm payrolls rose by 175k in April, significantly less than the 240k gain expected according to Bloomberg, and marking the smallest gain in six months. The three-month average, meanwhile, declined from 269k to 242k. March payrolls were revised up from a 303k gain to a 315k increase. However, with additional revisions to previous months, the?overall change in nonfarm payrolls (April data + net revisions) was 153k.

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In the details of the report, private payrolls rose by 167k in April following a 243k gain in March. Hiring was widespread across a plethora of categories in April with goods-producing payrolls rising by 14k, due to a 9k gain in construction payrolls and an 8k rise in manufacturing payrolls. Private service producing payrolls, meanwhile, rose by 153k in April following a 204k gain in March. Education and health payrolls led the gain in April, rising 95k the largest monthly gain since January, and trade and transport payrolls rose 52k in April, due to a 20k rise in retail trade payrolls. Financial payrolls, meanwhile, increased by 6k, the most in four months, and leisure and hospitality payrolls climbed 5k, albeit much lower than the 53k rise in March. On the weaker side, professional and business services payrolls fell outright, declining 4k, due to a 16k drop in temporary help payrolls, and information payrolls declined 8k. The biggest loss of momentum, meanwhile, was in government hiring, up just 8k compared to an average monthly gain of 62K since December.?

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Household employment rose by 25k in April, the second consecutive month of expansion. The labor force, meanwhile, increased by 87k, more than three times the gain in household employment. Thus, the unemployment rate unexpectedly ticked up from 3.8% to 3.9% in April. According to the median forecast, the unemployment rate was expected to remain at 3.8% for a second consecutive month. April’s 3.9% unemployment rate, however, still marks the 27th consecutive month below 4%, the longest stretch since the 1960s.

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The labor force participation rate, meanwhile, remained steady at 62.7% in April for the second consecutive month, as expected.

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Also, average hourly earnings rose 0.2% in April, a tenth of a percentage point less than expected and following a 0.3% increase in March. Year-over-year, wages rose 3.9%, down from a 4.1% gain in March, and now marking the weakest annual rise since May 2021.

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Finally, the average workweek ticked down from 34.4 to 34.3 hours in April.

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Bottom Line: A cooler-than-expected but still solid headline rise suggests the labor market remains tight, but perhaps not quite as tight as previously indicated at the start of the year, resulting in at least some upward movement in the unemployment rate and downward or at least, less?upward pressure on wages.?

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For the Fed, the latest gain in hiring and ongoing elevated level of labor costs reinforces the Committee’s assessment of “solid” job gains, as well as the ongoing inflationary challenges.?Opting to hold rates steady for the sixth consecutive meeting this month, Chair Powell was clear the Committee would likely need to remain patient on the sidelines for much longer than previously expected to gain confidence that price pressures are sustainably easing course.?Nevertheless, Powell also indicated that the Fed’s next move would likely be a rate cut and not?a rate hike, largely dismissing the prospect of stagflation, or the scenario of inflation continuing to push higher despite three consecutive months of accelerating price pressures.?

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In other words, it may take longer than initially expected, but the Fed remains focused on policy easing?– eventually, a patient position further justified by April’s?benign employment report.?In the meantime, with the Fed moving forward with at least the first step of reducing policy firming by altering the portfolio's roll off, the Committee has again signaled a more dovish stance and a growing lean towards – eventual – rate cuts.?

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Investors are also anxious for policy easing with this morning's employment miss pulling forward expectations for the first-round rate cut from November to September.??

Equities are trading higher while longer date yields are off earlier highs ahead of the data release.?The Nasdaq is up 2% at 16,156.65, while the 10-year is down 10bps, currently trading at 4.48% as of 9:42 a.m. ET, the lowest since April 9 (an 18-day low).?

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Recall, on Wednesday,?the Fed opted to leave rates unchanged for the sixth consecutive meeting for a total of 11 months since July.?

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In the statement, also as expected, the Fed maintained its solid assessment of economic conditions and strong job gains, although the Committee did downgrade its assessment of inflation, noting the lack of?“further progress.”?

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Finally, the Fed also maintains that the risks between reaching its employment and inflation goals?“have moved toward better balance over the past year.”

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The biggest adjustment came on the balance sheet with the Fed announcing specifics in terms of tapering quantitative tightening. According to the statement, the Committee will reduce the monthly redemption cap on Treasury securities from $60 billion to $25 billion, more than the expected reduction to $30 billion. The Committee, meanwhile, will maintain the monthly redemption cap on agency debt and agency mortgage-backed securities at $35 billion, tilting the composition back towards UST.?

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The vote was unanimous.

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Yesterday on the economic calendar, initial jobless claims unexpectedly remained at 208k in the week ending April 27. According to the median forecast, jobless claims were expected to rise to 211k. The four-week average, however, ticked lower from 214k to 210k. Continuing claims, or the total number of Americans claiming ongoing unemployment, also held steady at 1.774M in the week ending April 20.

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Also yesterday, the March trade deficit was virtually unchanged, narrowing slightly from -$69.5b to -$69.4b, the highest in nearly a year. According to the median forecast, the deficit was expected to widen to -$69.8b. The value of imports declined 1.6% from $332b to $327b, and the value of exports fell from $263b to $258b in March.

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Nonfarm productivity rose 0.3% in the first quarter following an upwardly revised 3.5% gain the quarter prior. According to the median forecast, productivity was expected to increase 0.5% in Q1.

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Unit labor costs, meanwhile, jumped 4.7% in the first quarter, surpassing the 4.0% increase expected and the largest gain in a year.

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Finally, yesterday, factory orders rose 1.6% in March, as expected and the largest gain in four months.

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Additionally this morning, the S&P Global U.S. Services PMI was revised up from 50.9 to 51.3 in the final April report, albeit still a five-month low. The Composite PMI, meanwhile, was also revised higher from 50.9 to 51.3, still marking however a four-month low.

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Finally this morning, the ISM Services Index unexpectedly dropped into contractionary territory (a reading below 50), declining two points to 49.4, the lowest reading since December 2022. According to the median forecast, the services index was expected to rise to a reading of 52.0 at the start of the second quarter.

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In the details of the report, prices paid jumped 5.8 points to 59.2, the highest since January, supplier deliveries rose from 45.4 to 48.5, backlog of orders climbed by 6.3 points to a reading of 51.1, and the change in inventories increased from 45.6 to 53.7 at the start of the second quarter. On the other hand, business activity plunged from 57.4 to 50.9, the lowest since May 2020, and employment ticked down from 48.5 to 45.9, averaging 47.9 over the past six months and the lowest since December 2023. Meanwhile, new orders declined from 54.4 to 52.2 in April, the lowest reading since December 2022.

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Next week, the economic calendar is relatively light beginning on Tuesday with an updated look at consumer credit. Consumer credit is expected to rise by $16.5b in March following a $14.2b gain the month prior.

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On Wednesday, weekly mortgage applications data will be released, along with the final March read on wholesale inventories.

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On Thursday, initial jobless claims and continuing claims data will be released.?

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Wrapping up the week, on Friday, the preliminary University of Michigan Consumer Sentiment Index report for May will be released.

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Finally, following this week’s FOMC meeting, we will hear from a number of Fed officials including New York Fed President John Williams, Minneapolis Fed President Neel Kashkari, Governor Lisa Cook and Chicago Fed President Austan Goolsbee. Additionally, on Monday, the Senior Loan Officer Opinion Survey on Bank Lending Practices report for Q1 will be released.?

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-Lindsey Piegza, Ph.D., Chief Economist

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