Better Than Expected NoBetter Than Expected Non Farm Payrolls in Apriln Farm Payrolls in April

• In April, the U.S. economy lost only 20K jobs, which was much better than expected
• The unemployment rate ticked lower to 5.0% from 5.1% in March
• The losses were pretty widespread with the largest losses recorded in trade and transport, retail trade, construction and manufacturing

The nonfarm payrolls report surprised on the upside today with a smaller than expected loss of 20K jobs as compared to the markets' expectation for a decline of 75K. On a three month moving average basis, job losses in April amounted to 61K. The unemployment rate actually fell to 5.0% from 5.1% in March. Revisions did not play much of a role in April with only a modest 1K drop in March's number to -81K.

The composition of job losses in April exposed broadly based losses. The goods producing sector lost 110K while services remained generally strong adding 90K. Of the major declines in April, the largest was in construction, which lost 61K, followed by manufacturing, which lost 46K jobs. The losses in construction on a three month moving average are now 50K, which is more or less in line with the pace of job losses in the 1991 correction. The manufacturing sector has been unable to leverage the strong demand from overseas and keep jobs, but most employment indices for the manufacturing sector have indicated weakness, so this comes as little surprise. Following that, trade lost 36K and retail trade lost 27K. There were, however, some categories which gained modestly. These included business services which added 39K and education/health which added 52K. Leisure and hospitality added 18K and remains well supported by the influx of tourists to the U.S. who are taking advantage of the weak U.S. dollar.

In terms of earnings, there is a clear deceleration that is occurring with average hourly earnings up only 0.1% in April. More specifically total private hours of work were down 0.3% in April and in manufacturing, hours of work were down 0.7% M/M. As businesses slowly throttle back the number of hours they require workers to work, earnings will slow. This supports the general slowdown in income growth consistent with a weakening economy. Evidence of this trend is found in the diffusion index which fell again in April to 45.4 from 48.0 in March and suggests that job losses are more widespread. On balance, this report was indeed an upside surprise, but we still contend that there are more job losses in the pipeline. We do think, however, that this report will allow the Fed a temporary sigh of relief as it suggests that the labour market is not falling off a cliff and that they may be able to slow the pace of rate cuts.