Job Gains are Solid, On Average; Unemployment Edges Lower!
Today’s employment report confirms our take on the dip in payroll growth in last month’s report [link]. We saw the March sag in payroll gains as a transitory blip that would be followed by a return to robust growth in April, and that’s what happened. Moreover, today’s report provided a positive surprise with respect to the unemployment rate. We had thought the unemployment rate might edge up a tenth in April after the two
tenths decline in March; instead, it declined a tenth further, to 4.4%. We have raised our probability of a rate hike at the June meeting to 80% from 70% after today’s employment report, reflecting, among other factors, the further decline in the unemployment rate.
The most noteworthy news was a further decline in the unemployment rate (U-3). We had expected a one-tenth increase after the outsized two-tenths decline the previous month. The unemployment rate has fallen an impressive four-tenths since January following a period during which it had moved mostly sideways. The last time U-3 was 4.4% was in May 2007, and the unemployment rate should continue to fall at least through next year as growth continues at an above-trend rate. The unemployment rate is now 0.4 percentage points lower than at the time of the March meeting, so FOMC participants will have to significantly relevel their paths of the unemployment rate down in their updated projections for the June meeting.
In addition to the further drop in the U-3 measure, the U-6 measure–which includes all persons marginally attached to the labor force, plus total employed part-time for economic reasons—dropped another three tenths. U-6 has now declined eight tenths over the last three months and hasn’t been this low since late 2007. The gap between U-3 and U-6 has been narrowing steadily, and now looks pretty close to normal. Thus, the case that elevated levels of broader measures of unemployment suggest that there is more slack than the headline U-3 measure might indicate no longer seems a strong one.
As for the establishment survey, monthly payroll employment growth rebounded sharply, to 211K, after the unexpected dip in March to a downward-revised 79K gain. The three-month average pace of payroll gains, 174K, remains strong. The language in the statement after Wednesday’s FOMC meeting that job gains were solid “on average” in recent months still holds true. Average hourly earnings continued to advance, posting a healthy gain of 0.3% in April. On balance, we see the recent wage data, including evidence from the ECI and more-volatile compensation per hour figures, as indicative of a tightening labor market. This, in turn, could make FOMC participants more confident that core inflation will rise to 2% by next year.
Bottom line: All told, the report raises the probability of a hike in June, to 80% in our view. As we have emphasized previously, we and the FOMC view the employment data as a more reliable indicator of the underlying momentum in economic activity than the spending data. Indeed, the further decline in U-3 adds a sense of urgency to continue with the gradual pace of hikes in June—notwithstanding the dip in the 12- month measures of core inflation and the recent slowdown in consumer spending—and should help maintain a strong consensus among FOMC participants for three hikes in total this year.