• US adds just 164,000 jobs in April
• Unemployment rate falls to 17-year low
• Wages rose 0.1% mom, 2.6% yoy
• April jobs report signals the Fed does not have to rush to raise interest rates

US economy generated a solid 164,000 jobs in April to push the unemployment rate below 4.0%, a sign the surging labor market shows no signs ebbing.

The increase in hiring fell short of the 190,000 forecast, but the shortfall was cushioned by upward revisions that show the US created more jobs in March than originally reported. March data was revised up from 103,000 to 135,000, while February was revised down from 326,000 to 324,000. On a net basis, those revisions added 30,000 jobs to the numbers previously reported. Jobs gains appeared broad based, with most sectors experiencing gains over the month. The increase in new jobs last month was spearheaded by professional businesses. They added 54,000 workers. Manufacturing jobs continue to show upward momentum—up 24,000 in March and up an average of 26,000 over the past three months. Construction jobs also showed a gain of 17,000 and are up 25,000 on average over the past three months.

Wage growth, however, was the major disappointment. April’s average hourly earnings came in at a 0.1% mom increase (2.6% yoy). Additionally, average hourly earnings for March were revised down to +0.2% from the originally reported +0.3%.

After six months at 4.1%, the unemployment rate broke through the four percent level and declined to 3.9%. That puts it at the lowest level in 18 years. While this marks a new trough in the unemployment rate, the drop in the unemployment rate was primarily due to a decrease in the size of the labor force, however, as the labor force shrank by 236,000 people.

The larger-than-expected reported drop in the unemployment rate to 3.9% from 4.1% provides additional evidence of tightening labour markets. This rate is significantly below what the Fed has characterized as full employment within a range of 4.3% to 4.7%. Broader measures of unemployment, such as the U6 measure (which includes people who can only find part-time work and those who have gotten so discouraged they recently stopped looking), also dropped to 7.8% in April. That is down from 8.0% in March and below pre- 2008/09 recession levels for the first time this cycle.

Despite the ultra-tight jobs market, wages for American workers still aren’t rising rapidly. Hourly pay rose 0.1% mom. The 12-month increase in pay was flat at 2.6% for the third month in a row.

April jobs report signals the Fed does not have to rush to raise interest rates

The solid April jobs report is further confirmation of the excellent labor market in 2018, even if some of the details were not as good. A sub-4.0% print for the unemployment rate best exemplifies how tight the demand for labor is getting in the US. The labor force fell by 236k, the second consecutive month of decline. As a result, the labor force participation rate ticked down a tenth of a point to 62.8%.

The expectation of rising inflation has been a key theme in recent months, and wage growth has been a substantial market focus. April’s lower-than-expected wage numbers may have placed somewhat of a damper on those inflation expectations. However, with the economy performing better than expected in the first quarter and likely to expand at a 3% average pace over the next few quarters, wage pressures should gradually build.

Although the FOMC decision last week was largely uneventful, the focus of the Committee is likely to remain on the evolution of wage and prices. There are broad signs that both are heating up, and a stimulus-fuelled economy should only encourage further firming in these measures. So long as downside risks fail to materialize, we anticipate that the FOMC is on pace to continue to raise rates. We expect two more 25 basis point hikes in 2018.

Source: BIMB Securities Research - 7 May 2018