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Slower Payrolls May Be a Warning Sign… But of What?
Friday, May 06, 2016

In some ways, the April jobs report was a pessimist’s dream. The slowdown in job gains means either that weakness in recent economic data and corporate profits is finally hitting the labor market or that we are approaching what economists call “full employment.” In the latter case, the Fed needs to worry not only about when to raise rates, but how to talk up that possibility and avoid getting hopelessly out of sync with the financial markets.

Yet the report itself was actually pretty solid. The headline figures were certainly disappointing: nonfarm payroll growth slowed to 160,000 (from 208,000) and the prior two months were revised downward by a cumulative 19,000. The unemployment rate was unchanged at 5.0% and that was accompanied by a decline in the labor force participation rate. Yet behind those headlines stood some respectable underlying trends: the number of people reporting that they were unemployed declined and the 3-month moving average of payrolls barely budged (200,000 versus 209,000 as reported in the March jobs figures, now revised down to 203,000), since January was a similarly weak month. Even the single-month figure of 160,000 is well above the level needed to keep the unemployment rate declining.

The story gets better when you look at the industry breakdown. Slowdowns in job gains were concentrated in just a few sectors – and not particularly surprising ones. Construction jobs pulled back after a few hot months, but housing permits have dipped too. Retail trade jobs were down, but what do you expect after three months of soft consumer spending? Most other industry categories held fairly steady, and several posted significant improvements, including professional and business services and even manufacturing. Of course, the decline in retail jobs is not a good sign for April consumer spending, but the steadiness in temporary jobs is a modest positive.

Two points of data received some hype in the lead-up to and immediate aftermath of the report, but they weren’t really all that exciting. Yes, the decline in labor force participation was disappointing. It reversed the prior two months’ gains and then some. In part, this may have been a reversion to the longer term trend after a string of upticks. Many economists believe that long-term demographic trends will continue to send participation lower over time. That would be consistent with an argument that surfaced this week about the prior rise in participation being caused not by people being pulled into the job market but by an abnormal (and perhaps temporary) slowdown in workers exiting the market – for example, by delaying retirement.

As for wages, don’t get too excited about the modest rise in average hourly earnings (AHE) to a 12-month gain of 2.5%. A calendar quirk had been widely expected to drive this number higher and the final print was merely on expectations. While it’s encouraging to see another month of solid wage growth, this is not a clear break-out number. That said, the 2-month annualized growth rate in AHE now stands at 3.4%, versus 2.4% for the 3-month annualized growth rate, so we are only one or two strong reports away from more serious concerns about wage inflation. It’s still a game of inches, I’m afraid.

Barring a dramatic turnaround over the next 4 to 6 weeks, there’s enough weakness in this report and other recent data to keep a June rate hike off the table. But don’t expect the Fed to come out and admit that. As much as the growth outlook looks weak and its risks biased to the downside, policy makers can’t ignore the signs that the domestic labor market may be close to full employment. As ever, the Fed’s job is to keep the market honest – and in this case, on board with watchful waiting.

about the author

As chief economist at iCIMS, an industry-leading provider of talent acquisition software, Josh Wright leads a team of data scientists in analyzing emerging trends in the U.S. labor market