US Employment Report Disappoints Again

Payroll employment came in at only 115,000 in April. Some of the sting of the weak jobs increase was taken away by the revision that took March growth up to 154,000, from 120,000. But the two-month slowdown is still very clear. Job growth in March and April averaged 135,000, down from an average 252,000 per month in the three months to February. And while the unemployment rate fell in March and April, both drops reflected fewer people looking for work, not greater employment.

In the payroll details, manufacturing added 16,000 jobs, down from 41,000 in March, showing its weakest gain since November. The gains were concentrated in fabricated metals and machinery (in line with recent months), but motor vehicle hiring slowed, and nondurables jobs were almost flat after a strong gain in March. Overall manufacturing production-worker hours rose 0.5%, a positive sign for manufacturing output growth (after a drop in hours during March). Construction was a negative, but only a small one, losing 2,000 jobs. The "warm winter" boost helped construction in December and January, but has since faded.

Private services employment growth was 116,000, down from 128,000 in March, and the slowest month since August. The biggest gain was in retail (up 29,000), where a bounce was no surprise after two sharp declines in February and March. Professional and business services (up 28,000), food services (up 20,000), and healthcare (up 19,000) continued to show strength. Temporary jobs rose 21,000; the 9,000 drop in March proved to be just a correction after an outsized 50,000 increase in February. But there were drags from transportation and warehousing (down 17,000) and from arts and entertainment (down 15,000). Within transportation, an 11,000 drop in ground transit may have reflected the timing of school holidays (affecting school bus drivers).

The government sector shed 15,000 jobs. Federal employment dropped 4,000. State and local government employment fell by 11,000, after giving hints of stabilization in previous months. The timing of school holidays may also have played a role here, since the entire drop was explained by 11,000 fewer jobs in local education.

The private workweek was unchanged at 34.5 hours. A steady workweek combined with only a small increase in private employment generated a small 0.1% increase in hours worked, reversing March's dip. Hours worked surged 3.8% in the first quarter, the strongest quarter yet in the recovery. The second quarter appears on course for a more subdued increase of around 2%.

Average hourly earnings were flat month on month and up just 1.8% year on year (y/y)—still well below the CPI inflation rate, which is at present 2.6% y/y. The continuing decline in the unemployment rate may raise questions about how much slack actually remains in the labor market, but the absence of wage inflation suggests that slack is plentiful. Overall payrolls (wages multiplied by hours) rose just 0.2%, suggesting only a small increase in private wages and salaries during April.

The lower unemployment rate, at 8.1%, reflected a 169,000 drop in household employment, combined with an even bigger 342,000 drop in the labor force. The labor-force participation rate (the proportion of the adult population in the labor force) hit a new low for this cycle, at 63.6%, a level not seen since December 1981.

The most comprehensive measure of underemployment (U-6)—which includes workers who would like a job but are not currently looking, plus those working part time who would rather work full time—remained at 14.5%. The picture remains very bleak for the long-term unemployed. The proportion of long-term unemployed (27 weeks or longer) did fall to 41.3%, from 42.5%, which at first glance seems encouraging. However, the drop in labor-force participation suggests that reduced long-term unemployment reflects people giving up the search for jobs, perhaps because they have exhausted their unemployment benefits. The longer that potential workers remain either unemployed or on the sidelines outside the labor force entirely, the less likely that they will ever get back into employment.

The rapid 250,000-plus job gains in the three months to February were inconsistent with the modest pace of recovery in overall output—GDP was up only 2.2% in the first quarter. It now appears that jobs have decelerated into line with GDP, rather than GDP accelerating to catch up with jobs.

The employment deceleration results partly from warm winter weather that pulled some hiring forward, producing a payback now. For that reason, we think that the March and April payroll figures understate the pace of recovery, and look for a better but still subdued pace of job creation at 150,000–200,000 over the rest of the year, in line with modest GDP growth running at or just above 2%. If that's right, the Federal Reserve probably will not be tempted to launch another round of quantitative easing.

by Nigel Gault