April Jobs Report Beats Estimates, But Underlying Data Was Weak

April Jobs Report - Creation Beats Estimates

April Jobs Report - Job creation in April beat estimates and the past 2 reports saw positive combined revisions of 16,000. However, the details of this report weren’t great as I’ll review later in this article. 

As you can see from the chart below, job creation was 263,000 which beat estimates for 180,000. It also beat the high end of the estimate range which was 240,000. This was the 23rdbest jobs report this cycle which is great since the labor market is relatively full.

The prior month was revised 7,000 lower to 189,000, but February was revised up to 56,000. It seems like whenever there is a huge report where about 300,000 jobs are created either the next report is bad or it gets revised lower. Similarly, when an initial report shows under 50,000 jobs were created, it seems like the next few months are great or it gets revised higher. That’s why you can’t trust the initial reading if it’s far out of line with the recent trend. It’s just like the GDP report.  

The headline from this report was that the unemployment rate fell to a 49 year low. Unfortunately, that’s because people left the labor force, meaning this wasn’t a great report. 

Specifically, the unemployment rate fell from 3.8% to 3.6%.

April Jobs Report - Which was below estimates for 3.8% and below the low end of the consensus range which was 3.7%. There were 236,000 jobs created by private companies which means the government added 27,000 jobs. Implied in the estimates, the government was only expected to add 2,000 jobs. In the middle of next year, the government will be hiring temporary workers to calculate the 2020 census. I will review that more closely early next year.

As you can see from the chart above, there were 4,000 manufacturing jobs added which missed estimates for 10,000. That’s consistent with the employment index in the manufacturing ISM report. It fell 5.1 points to 52.4. The March reading was revised up from -6,000 to 0. 

Average manufacturing weekly hours worked plus overtime hours for production workers fell 2.33% yearly which is the biggest decline since the financial crisis. It’s consistent with the overall decline in the length of the work week, but keep in mind its comparison was the strongest since 2011. Therefore, the 2 year growth stack isn’t as bad as the depths of the 2015-2016 manufacturing recession.

Retail trade lost 12,000 job as the industry is shrinking because of the decline in general merchandise brick and mortar stores. As the ADP report showed, professional and business services and education and healthcare services were the biggest job creators. They added 76,000 and 62,000 jobs. Even though the residential real estate market is weak, construction still added 33,000 jobs. This industry is facing a labor shortage.

The Bad News From This Report

April Jobs Report - Now let’s get to the bad news from this report. The labor market shrunk, the participation rate fell, and the work week length fell. That makes this report terrible even though job creation beat estimates. The unemployment rate is immaterial because people left the labor force. The underemployment rate has been stuck at 7.3% for 3 months.

As you can see from the chart below, the spread between the U6 rate and the U3 rate increased from 3.5% to 3.7%.

Specifically, the number of people not in the labor force increased by 646,000. That came from population growth of 156,000 and the 490,000 decline in the number of people in the labor force. The 490,000 decline came from a 387,000 decline in the number of people unemployed and a 103,000 decline in the number of people employed. 

That’s right, even though job creation was 263,000, there were actually 103,000 less people employed this month versus last month. In the past 3 months, the labor supply has fallen over 750,000 which isn’t sustainable.

Wage Growth & Participation Rate

April Jobs Report - Average hourly wage growth of 3.2% missed estimates for 3.3% and was the same as last month. This looks fine, but it’s terrible when you see the length of the average workweek fell from 34.5 hours to 34.4 hours. That doesn’t seem like a huge decline, but it pushed average weekly wage growth down from 3.24% to 2.94% which is the worst reading since January 2018.

As you can see from the chart below, it had been range bound. 

It’s not a huge surprise that this was range bound even in this relatively tight labor market because it had a big spike in 2017. I expected this range to be ended by a spike to the upside, not to the downside. The good news for workers is inflation has been weak.

Overall labor participation rate fell from 63 to 62.8%. Even though it seems like a minor drop, that’s a huge deal. It’s the difference of hundreds of thousands of workers leaving the labor force. This wasn’t just because of people retiring as the prime age labor force participation rate fell from 82.5% to 82.2%. 

That monthly decline of 0.36% was the biggest drop since September 2014. It was horrible. The only good spin you can put on this is the slack in the labor force increased. However, that’s dubious because in a strong labor market, this many people don’t exit the labor force. Slack won’t be an issue if the labor market keeps heading in this direction.

To be clear, while this wasn’t a great labor report, it doesn’t mean the labor market is about to turn south. In the next few months, I expect the prime age labor force participation rate and average weekly wage growth to increase.

April Jobs Report - Conclusion

April Jobs Report - Headline job creation was amazing, but the details of this report were grim. It doesn’t mean I’m now bearish on the labor market and consumer spending.

However, I will be if a few more bad reports like this come out. I don’t understand why the stock market rallied on Friday after this report came out. Maybe the algos just reacted to the headline reading. 

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