• The US economy added 253,000 jobs in April

• Revisions to the two prior months were negative, subtracting 149k from the previously reported figures

• Unemployment rate ticked lower to 3.4%

• Average hourly earnings increased by 0.5% MoM, 4.4% YoY

• Labor force participation remained at 62.6%

• Challenges are mounting

US job growth accelerated in April while wage gains increased solidly, pointing to persistent labor market strength despite bank turmoil and a decelerating economy. Nonfarm payrolls rose by 253,000 jobs in April. The change in total nonfarm payroll employment for February was revised down by 78,000, from 326,000 to 248,000, and the change for March was revised down by 71,000, from 236,000 to 165,000. With these revisions, employment in February and March combined is 149,000 lower than previously reported. Job growth has averaged 290,000 jobs per month over the prior six months.

The service-providing sector accounted for most of the job gains in April, with professional and business services adding 43,000 positions. But temporary help services employment, seen as a harbinger for future hiring, dropped by just over 23,000 positions and is down by 174,000 since its peak in March 2022. Healthcare payrolls increased by 40,000. Employment in the leisure and hospitality industry rose by 31,000 jobs, mostly concentrated at restaurants and bars. Hiring in the sector, which has been the main job growth driver, is slowing. Employment in the industry remains 402,000 jobs below its pre-pandemic level. Financial activities payrolls rose by 23,000, as did the government jobs category. Government employment remains 301,000 positions below its pre-pandemic level. Manufacturing, retail and construction payrolls rebounded after declining in March.

The unemployment rate fell to 3.4% during the month, matching a 53-year low. After rising in each of the past four months, the labor force participation rate was essentially unchanged at 62.6% in April. Wage growth came in on the high-side, with average hourly earnings rising 0.5% during the month, resulting in the year-onyear rate of wage growth rising to 4.4%

The unemployment rate was 3.4% and tied a record low going back to May 1969. The unemployment rate has ranged from 3.4% to 3.7% since March 2022. The labor force participation rate held flat at post-pandemic high of 62.6% while the employmentpopulation ratio, at 60.4%, were also unchanged in April. Both measures remain below their pre-pandemic February 2020 levels (63.3% and 61.1%, respectively). The number of unemployed people decreased by 182k to 5.7mn and employment levels rose by 139k to 161mn. Adults in their prime working age of between 25 and 54 are back in the workforce at rates not seen since before the labor market wreckage of the Great Recession. A more encompassing number that includes discouraged workers and those holding part-time jobs for economic reasons edged lower to 6.6%.

Average hourly earnings, a key inflation barometer, rose 0.5% for the month, the biggest monthly gain in a year. On an annual basis, wages increased 4.4%. Both numbers still show a fairly strong pace of wage growth and could raise the chances that the Federal Reserve could decide to raise interest rates again in June, though markets were only pricing in a small probability following the jobs report.

Challenges are mounting

Employers created 253,000 jobs in April, keeping the US economy afloat amid a banking crisis, rising interest rates, the prospect of devastating US government default and a spike in layoffs. Although job growth accelerated in April, but there were certainly some indications in the report suggesting that the labor market is softening. Revisions to the two prior months were significantly lower, while the three-month moving average shows the pace of hiring has continued to decelerate. Moreover, the breadth of hiring – while having ticked higher in April – remains well below year ago levels.

Wages, which have been growing more than the Federal Reserve would like to tamp down inflation, accelerated between March and April, with average hourly earnings increasing by 0.5% MoM. Wage growth - which is good for workers and drives consumer spending - could also be contributing to inflation. Wage growth is too strong to be consistent with the Fed's 2% inflation target.

Should the strength seen in April extend in the months ahead, it could push the Fed to hike a bit more. While the labor market appears to be rock solid at present, we still expect some cracks to form in coming months. Demand for labor clearly is cooling. Other labor market indicators – such as job openings, which are trending down, and initial jobless claims, which continue to trend up – are not in tune with this view. While job openings remain elevated compared to pre-pandemic norms, the count of vacancies continues to trend lower and fell to 9.6mn in March, the lowest level since April 2021. So far in 2023, jobless claims have shifted slightly higher from the relatively low levels averaged last year, indicating an increased pace of layoffs. Most recently, initial claims rose to 242k in the last week of April. Hence, it’s unclear if things are progressing fast enough. The FOMC has left the door open to another rate hike in June, and they may need to follow through on that if we do not see a more meaningful cooling in labor market conditions over the next few months. The report poured cold water on financial market expectations that the Fed would start cutting interest rates this year. All told, the upcoming data will continue to bear careful watching, with CPI report next under the magnifying glass.

Source: BIMB Securities Research - 8 May 2023