The most disappointing economic headline was that payroll growth slackened in April to 160,000, well short of consensus expectations and the slowest in seven months. Meanwhile, civilian employment, an alternative measure of jobs that includes small business start-ups, declined 316,000. Normally, a drop in civilian employment this large would mean a higher unemployment rate, but the labor force fell 362,000, so the unemployment rate remained at 5.0 percent.
However, don’t get panicky: It’s just one month’s data and the trends over the past year remain solid. In the past twelve months, payrolls are up 224,000 per month and civilian employment is up 208,000 per month. And, in spite of the drop in April, the labor force is up 1.9 million in the past year. Even the labor-force-participation rate — which declined to 62.8 percent in April from 63.0 percent in March and remains very low by historical standards — is slightly higher than it was a year ago.
So how can we stay bullish about further improvements in the labor market? Because both wages and hours worked show plenty of demand for workers. Average hourly earnings grew 0.3 percent in April and are up 2.5 percent in the past year. Meanwhile, total hours worked rose 0.4 percent in April and are up 2.1 percent from last year. As a result, total cash earnings (excluding fringe benefits and irregular bonuses and commissions) are up 4.7 percent from a year ago. In an environment where consumer prices are up about 1 percent, that leaves lots of room for more consumer purchasing power.
The financial markets reacted to this morning’s report by reducing the odds of a June rate hike to only 4 percent. We think that’s absurdly low. In the past, Federal Reserve Chief Janet Yellen has watched the share of voluntary job leavers (or “quitters”) among the unemployed as a sign of labor-market strength. In April, that share hit 10.8 percent, the highest since 2008 and barely below the average of 10.9 percent during the past 30 years.
Expect a trend rebound back toward job growth in May and for expectations of a June rate hike to move back up over the next several weeks.