Bimb Research Highlights

Economics - US Economy - US employment growth remains strong in April

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Publish date: Mon, 09 May 2022, 08:37 AM
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Bimb Research Highlights
  • Nonfarm payrolls employment grew 428,000 in April
  • Downward revisions subtracted 39,000 jobs from the two prior months
  • Unemployed rate held steady at 3.6%
  • Average hourly earnings rose 0.3% mom, 5.5% yoy in April
  • Labor force participation declined to 62.2%
  • Tight labour market to keep Fed hiking

The US economy added slightly more jobs than expected in April amid an increasingly tight labor market and despite surging inflation and fears of a growth slowdown. The US added a solid 428,000 new jobs in April, but an acute labor shortage showed little improvement last month and threatens to add to the highest inflation in 40 years. As of April, total payroll employment remains 0.8% below February 2020 levels. The change in total nonfarm payroll employment for February was revised down by 36,000, from 750,000 to 714,000, and the change for March was revised down by 3,000, from 31,000 to 428,000. With these revisions, employment in February and March combined is 39,000 lower than previously reported.

Employment gains were widespread, with leisure and hospitality (78,000) seeing the biggest gains on the month. The unemployment rate for the sector, which was hit hardest by the Covid pandemic, plunged to 4.8%, its lowest since September 2019 after peaking at 39.3% in April 2020 although employment in this sector still remains 8.5% below pre-pandemic levels. Hiring in goods producing (66,000) industries was largely concentrated in manufacturing (55,000). Other big gainers included transportation and warehousing (52,000), professional and business services (41,000), financial activities (35,000) and health care (34,000). Retail & wholesale trade also showed solid growth, adding 51,000 primarily from gains in food and beverage stores. Government (22,000) hiring was also strong in April.

The unemployment rate held steady at 3.6%, as both the labor force (-363k) and number of people employed (-353k) fell by roughly the same amount. As a result, the participation rate declined by 0.2 percentage points to 62.2%. Average hourly earnings rose 0.3% mom, which was up 5.5% on a yoy.

The unemployment rate, which is measured by the household survey held steady 3.6%. The labor force – a measure of people working or actively looking for work – dropped unexpectedly, pushing the participation rate down to 62.2%, the first monthly decline since March 2021 as the labor force contracted by 363,000. The employment-population ratio, at 60.0%, were little changed over the month. These measures are each 1.2 percentage points below their February 2020 values. As a result, an already sizeable shortfall relative to the prepandemic trend, expanded even further. Without progress on this front, the labor market will remain very tight, providing little relief for businesses already struggling to attract workers. An alternative measure of unemployment that includes discouraged workers and those holding part-time jobs for economic reasons, sometimes referred to as the “real” unemployment rate, edged higher to 7%.

The lack of qualified labor continues to bid up wage costs. Wages are climbing rapidly, if not quite as fast. The average hourly earnings rose 0.3% mom in April and put the increase in the past 12 months at 5.5% - about the same as in March - the biggest gain since the early 1980s but still below the pace of inflation. The rate of US inflation leaped to 40-year high of 8.5% in March and showed little sign of quickly reversing. But the increase in pay has slowed this year after a big jump in 2021. A lower participation rate than the prior month stirred concerns about wage pressures persisting given the record number of job openings.

Tight labour market to keep Fed hiking

The job market continues to plough forward, buoyed by strong employer demand. After just over two years of the pandemic, the job market is remaining resilient and on track for a return to pre-pandemic levels this summer. However, the job market is showing some signs of cooling as it turns the corner and the recovery enters a new phase.

The pace of hiring remained robust in April with non-farm payrolls rising 428k, exactly matching March’s strong tally. The gains were spread solidly throughout all sectors. At this point, the biggest factor preventing an even stronger pace of hiring stems from the lack of labor supply. This was perhaps the most disappointing element of April’s employment report, as the pool of available workers unexpectedly declined.

The unemployment rate held steady at 3.6%, in combination with a softer average hourly earnings figure of 0.3% mom. While growth in hourly earnings remains strong, the average American is still struggling to see their wage keep pace with inflation. This has led many to seek full-time employment – resulting in the number of those that are part-time for economic reasons to have recently fallen to levels not seen since the early-2000s. Demand for labor remains very strong; the problem is a shortage of available workers, and the decline in the labor force participation rate in April could add to wage pressures.

The latest employment report should help assuage some of the recent fears that the economy is slowing. With the labor market still running hot and inflation at multi-decade highs, we expect the Fed to continue to move aggressively on raising rates over the coming months. The report likely will do little to sway the Federal Reserve from its current path of interest rate increases. The Fed announced that it would raise its benchmark interest rate half a percentage point in what will be an ongoing effort to stamp out price increases running at their fastest pace in more than 40 years. Fed Chair Jerome Powell last week talked of optimism that labor supply will return, but we have seen little sign so far and we are sceptical that things will change soon. As such we continue to expect a tight labour market that will keep upward pressure on employment costs.

The combination of a tight labor market, ample job opportunities and rising prices gives workers a significant amount of leverage in bargaining for higher wages. Hence, the Fed's success in slowing the economy and tempering wage and price pressures is of paramount importance. Overall, with labor market conditions still this strong - including very rapid wage growth - we doubt that the Fed is going to abandon its hawkish plans because of the current bout of weakness in equities.

Source: BIMB Securities Research - 9 May 2022

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