US: Not So Fast! Payrolls Receding More Slowly

Overview:

The April labour market report proved stronger than generally anticipated. The data revealed a job loss of 20,000 persons in April (consensus: -75,000, DB: -40,000) and a drop in the unemployment rate to 4.95% from 5.08% (consensus and DB: 5.2%). Prior months saw a mild net revision of -8,000 persons. Today's report is consistent with an economy which has come close to a standstill, but has not slid into a recession.

Market reaction:

The markets reacted significantly to the upside surprise in payrolls. The futures markets reduced bets on further reductions in the Fed funds rate during June or August to a little below 20% and now see hikes early next year. Two-year treasury yields initially jumped 20bp, while 10-year treasury jumped close to 15bp, leaving a flatter curve. The data helped the recent strong momentum in both the US dollar and US equity markets.

Details:

Despite today's more comforting data, the job momentum in the economy remains weak. That said, the current three-month average of -61,000 is more consistent with other labour market data and with actual economic activity than the unrevised three-month average of -77,00 in March. We think that today's report confirms the view that the labour market slowdown has recently been running a bit ahead of the actual slowdown in economic activity.

The details of the report show a major split in the private economy between service- and goods-producing industries. Job losses in the construction and manufacturing sector continue to pick-up speed, reaching 110,000 in April. Over the last three months, this part of the economy has shed 96,000 jobs on average per month. Contrary to this, the private service sector has continued to create jobs, again adding 81,000 payrolls in April. The momentum remains weak, albeit not disastrous, as the private service employment is up by 19,000 on average per month over the past three months.

Elsewhere the report was consistent with stagnant growth. Total private hours are down by 1% AR over the past three months, suggesting that the economy is continuing to grow, but only very slowly. One bad piece of news in the report is the continuing slowing of labour market incomes as suggested by the softening trend in average hourly earnings. With inflation at its current high levels, this leaves very little, if any, real wage gains for US households.

Assessment & Outlook:

Going forward, we expect a modest contraction in GDP of -0.5% q/q AR in Q2 GDP before the fiscal stimulus and the monetary-easing acts to revive the economy. This implies that employment growth is set to weaken a bit further - but still gradually - from here. In line with this, unemployment will continue to trend up. While there is still a lot of data ahead of us before the June monetary policy meeting, the better-than-expected state of the labour market increases the risk that the Fed will stand firm in June.