May Jobs

The April jobs report offered a little a bit for everyone. The topline employment number was right in line with expectations and remained consistent with the remarkably steady employment growth observed for the past year. Employers in April added 428,000 jobs, with private-sector payrolls gaining 406,000 jobs, while the unemployment rate remained at 3.6 percent. The labor force participation rate fell to 62.2 percent. 

Here is a brief summary of the major economic indicators since the last jobs numbers:

• The Producer Price Index for final demand increased 0.5 percent in April;
• The Consumer Price Index increased 0.3 percent in April;
• Real average hourly earnings decreased one cent from March to April;
• Orders for durable goods (including defense and aircraft) increased 0.4 percent in April;
• New home sales decreased 16.6 percent in April;
• The Price Index of U.S. imports were unchanged in April;
• ISM Services Index decreased 1.2 percentage points to 57.1 percent in April;
• ISM Manufacturing Index increased 0.7 percentage points to 56.1 percent in May;
• Consumer Confidence Index decreased 2.2 points from 108.6 to 106.4 in May;
• ADP reported private sector employment increased by 128,000 jobs in May.

Gordon's Guesstimate: May Jobs

The human body is remarkably perceptive to changes in physical orientation. Humans have eyes, ears, the vestibular system, and other physiological sensors to gauge their relationship to the physical world – essentially ways to tell us what is up and what is down. But these can be tricked. Indeed, skilled pilots, despite thousands of hours of flight time, can become disoriented in bad weather and, trusting their instincts and senses more than their instruments, find themselves flying upside down or otherwise at odds with their own perception. Down becomes up, and up becomes down. The current labor market may similarly confuse.  

The Federal Reserve very much has its instrument rating but will be reading the data in a somewhat inverse fashion than observers have been used to. The economic challenges of the last several decades have been considerable and varied, from mild recessions to economic 100-year floods (twice). But the recoveries therefrom were always one-sided – fiscal- and monetary-supported expansions (largely) until the next recession. Those recoveries were gauged on the degree to which jobs lost in prior downturns were recovered or the degree to which wage growth rebounded.  

Not so in the current environment where the Federal Reserve is paying a lot more attention to the “price stability” pillar of its dual mandate. This emphasis will be in tension with its charge to accommodate maximum employment. The Fed has already approved two consecutive hikes in the discount – and those policy changes are starting to have their intended effect, most evident in the housing market, which appears to be cooling (from very hot indeed).  

Accordingly, the vocabulary observers (this one included) normally apply to jobs reports probably needs more nuance than is typical. A “good” jobs report usually checks any number of boxes – typically showing growth in employment, earnings, and participation above expectations or prior trends. In the current environment, higher-than-expected employment or wages may suggest that the U.S. central bank has tamped down inflation that is widely perceived as the prevailing risk to the U.S. economy. Ordinarily, a single month of data is too noisy to weigh too heavily – the data are revised twice in successive months. But the next FOMC meeting is in two weeks, which means these reports are significant to the pilots at the Fed.

This guesstimator is assuming the jobs report will show that employers will add fewer workers to payrolls than has been the trend but will nevertheless reflect continuing high levels of demand for labor. Initial claims data popped in the middle of last month (roughly coinciding with the reference period for the employment report), job openings declined, and ADP reports, despite the unreliability of its first print, came in below recent trends. Keep in mind the level of these indicators still reflects a historically tight labor market, but directionally, these indicators may suggest that the Fed’s new stance is showing up a bit. This guesstimator is assuming employers will add 325,000 workers, unemployment will hold at 3.6 percent, and workers will see a 15-cent gain in earnings.