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US jobs market unexpectedly decelerates in April… labour shortages?
The US labour market saw a much more sluggish than expected improvement in the month of April, according to the latest employment survey conducted US Bureau of Labour Statistics (BLS). Despite many analysts predicting that the US economy would add something close to 1M jobs on the month, the latest survey showed that only 266K jobs were gained. Moreover, the BLS’s original estimate that 916K jobs had been added to the economy in March was revised lower to 770K jobs. Putting the two together, employment in the US appears to have been about 900K lower than expected in the month of April.
That significantly worse outcome that expected for employment gains was reflected in the unemployment rate, which surprisingly increased in the month of April to 6.1% from 6.0% on March, going against expectations for a drop to 5.8%. Part of that rise was, however, driven by an increase in the participation rate to 61.7% from 61.5% in March, which is a good sign for the recovery and economy. But the participation rate (as does the unemployment rate) remains significantly below its pre-Covid-19 levels; total employment in the US is still 8.2M below its pre-Covid-19 peak in February 2020.
Most analysts suspect that with high frequency data pointing in the right direction (i.e. weekly jobless claims have recent plunged to fresh post-pandemic lows under 500K per week, for example), today’s report is not a signal that the US economic recovery is at risk but could be a signal of labour shortages. Some economists have argued (and today’s data augurs in their favour) that enhanced jobless benefits, which include a government-funded $300 weekly supplement that was extended until September in the Biden administration’s recently passed $1.9T stimulus package, may be disincentivising people from returning to work, as the benefits package pays more than most minimum wage jobs. Others argue that fear of the Covid-19 virus may be preventing some from returning to work, despite all US adults now being eligible to be vaccinated, as well as ongoing childcare problems (in-person classes remain limited in many areas).
Sung Won Sohn, a professor of finance and economics at Loyola Marymount University in LA, commented that “the employment gain is understated in part because of the generous largess from Washington… Short-staffed restaurant owners are working overtime, truck drivers are impossible to find even after a hefty increase in hourly wages and loading docks at warehouses are keeping trucks idle as there aren’t enough workers.”
Despite weakness in job gains, Average Hourly Earnings growth was better than expected at 0.3% YoY (consensus analyst expectations had been for a -0.4% YoY drop due to lower wage employees in the service sector returning to normal work in larger amounts) and at 0.7% MoM. The surprise rise in wages is likely also a symptom of labour shortages, i.e. companies being forced to up wages in order to entice people back to work.
Another interesting dynamic was the shift in jobs between sectors; while the leisure and hospitality sector gained 331K jobs, which is solid though a lot smaller than many had expected, courier and messenger employment fell by 77K and grocery store employment fell by 49K. Meanwhile, temporary help services employment dropped 111K and manufacturing employment dropped 18K – rather than acting as evidence of a labour market shortage, this drop in manufacturing employment may be a sign that supply chain disruptions and raw material shortages reported in business surveys over the past few months (and starting to show up in the hard manufacturing sector data) may be weighing on employment in the sector. Just as a labour shortage may persist for some time (as long as unemployment benefits are as generous as they are), weakness in the manufacturing sector may also prove sticky.
Market Reaction
US equity markets have responded positively to the weaker than forecast labour market report, with the S&P 500 and Dow both pushing on to fresh all-time highs and the Nasdaq 100 making a solid recovery on the day in an attempt to get back into the green on the week. A weaker labour market recovery may not be a great signal for the US recovery, which may not be good for the prospect of further earnings growth, but it does push back the timeline for Fed policy normalisation. In other words, weak data equals lower for longer in terms of Fed interest rates, which is typically bullish for equities. Alternatively, equity traders may be interpreting today’s report as a sign that US government fiscal largesse with regards to unemployment benefits is just postponing when many Americans choose to return to work, which they may see as not a bad signal for the US recovery.
Bonds yields were initially lower, with the US 10-year yield dropping to a low of 1.47% from closer to 1.58% prior to the data, though most of the move has been reversed now, with 10-year yields back at 1.57%. Perhaps bond market traders are of the view that we should not read too much into one labour market report (as the Fed certainly will not, they prefer to watch a trend unfold over the course of three or more months), and that the labour market recovery will likely get back on course in the coming months. Perhaps this is why they bought the dip.
The US dollar, meanwhile, has been unequivocally hammered. The DXY, which traded in the 90.90s prior to the data, now trades in the 90.20s, down about 0.8% on the day. FX traders seem to be more taking the view of things that equity traders have, i.e. that today’s jobs report likely means lower for longer with regards to US interest rates.
What is next for stocks, bonds and the dollar?
Well, as is always the case, it depends. Do labour market shortages become a significant drop on employment over the coming months and do we subsequently have a string of weak employment reports like the April report? This is not going to be a good scenario for the US dollar and would likely be negative for yields as markets postpone expectations for policy normalisation from the Fed. This would probably be good for cheap-money addicted equities, however.
Conversely, does this report prove to be a one off and does hiring surge again in May onwards? With the recovery back on track, the dollar and yields may find some support in anticipation of Fed policy tightening sooner rather than later. While tighter Fed policy is likely to be taken negatively by equity markets, the prospect of higher earnings growth in a booming US economy is likely support stocks.
