April Job Report Not All Gloom and Doom
Gains in hours worked and hourly wage rates offset some of the sting of slower employment growth.
Gains in hours worked and hourly wage rates offset some of the sting of slower employment growth.
It was generally another poor week for markets, with most risk- and growth-oriented investments trending down while safer, less risky assets trended up. Equities showed a very broad range of performance, with U.S. equities declining just 0.3% for the week, European equities down close to 3%, and emerging markets down 4.5%. Following more worries about world growth, commodities also did poorly, sinking just over 3% for the week. Meanwhile, the U.S. 10-year Treasury yield dropped by 0.4%, consistent with worries about slower world growth.
U.S. economic data has looked slow for the past several weeks, and this week's softer headline employment data and continued softening in purchasing manager reports in the manufacturing sector seemed to confirm many bearish worries. Those same investors ignored an excellent auto industry sales report, positive purchasing manager data for nonmanufacturers, and some very bullish aspects of the employment report, including accelerating hourly wage growth and a very favorable mix shift in the jobs created. Although all isn't perfect in employment land, we were very impressed with the underlying details in the report. We are expecting some very good news on the retail sales front later next week that may change the tenor of discussions on economic growth in a positive way.
Job Report Reality Better Than the Gloomy Headlines Suggest
Most pundits focused their analysis of the jobs report on the seemingly slowing number of jobs added in the month of April. Indeed, headline job growth in April was a mere 160,000 well below the consensus forecast of 203,000 and the average of 232,000. However, the year-over-year growth rate was still up a very acceptable 1.9%. Furthermore, the quality of the jobs added was way above recent norms, hours worked increased, and hourly wages were up. Some of the more disappointing sectors also had some special quirks that softened the blow even in those segments. Putting everything together, it was a very good--though not quite great--report. Like the GDP report, there is still at least some evidence of a glacial slowing in growth. Employment growth is also relatively close to GDP growth, suggesting that productivity issues are continuing.
Single-month employment unit growth is often distorted by weather, holidays, and faulty seasonal adjustments. By looking at the year-over-year data, averaged over three months, we can see a much clearer picture of what is happening.
Job growth, similar to GDP growth, has slowed from roughly 2.17% to 1.92% over the last year, with little change in either direction in the first four months of 2016. The April figure a year ago was inflated a bit by favorable weather compared with the awful first quarter of 2014. So things aren't perfect, but the job machine isn't falling apart, either.
Spread Between GDP Growth and Job Growth Is a Bigger Source of Concern
Frankly, job growth probably needed a pause. The spread between GDP growth and employment growth, both on a year-over-year basis, has narrowed too much for our taste. The year-over-year GDP growth rate and the employment growth rate were both 1.9% for the most recent quarter. This is the third quarter in a row where GDP and employment growth have been almost identical. Usually employment growth tracks behind GDP growth because of productivity. Apparently there isn't much productivity growth to be found at the moment. This implies that either GDP growth needs to accelerate or employment growth needs to slow to bring things back into equilibrium.
If GDP growth were to stay about where it is now, or 2% or so, employment growth should be about 1.5%, implying monthly job additions of 165,000 to 175,000. That's why this month's jobs report could be the new normal, at least without some GDP acceleration. Given baby boomer retirements and a shrinking pool of potential new workers, that may not be as depressing a thought as it seems.
Gains in Hours and Hourly Wage Rates Offset Some of the Sting of Slower Employment Growth
As we are always quick to point out, employment growth is only one part of total take-home wages for all consumers. A combination of wage rates and, to a lesser degree, hour worked are even more influential on the total wage number. The data below excludes government, where this type of data isn't fully available.
Hourly wage growth remains relatively high with a single month 2.5% year-over-year growth rate and a 2.4% rate on an averaged basis. It's a bit unusual to see the wage rates move higher on both a year-over-year basis and a month-to-month basis in a lackluster month of employment growth. A favorable mix shift to better-paying jobs and new minimum wages at the low end of the market may be helping. Nevertheless, we think it is further evidence of a shrinking labor supply finally forcing up wages.
Hours worked were up for the month, but still down year over year, weighing on our total wage calculation. Total private sector wages paid have dropped slightly from an unsustainable high 4.9% a year ago to 4.3% for the most recent period, as shown above.
Best Sector Growth in Some High-Paying Sectors
The strong sectors in April included business and professional services, finance, and education and health. These are categories with high average wages and normal hours. The retail sector lost 3,000 jobs, and hotels and restaurants gained about 10,000 jobs less than usual (though those that had a job got a nice wage bump). Manufacturing turned in a small gain, and mining lost less jobs than in previous months.
On the negative side construction had a bad month, not gaining any jobs after adding an unusually strong 41,000 jobs in March, which clearly was not sustainable. Government jobs, which we thought had finally found a floor, managed to drop 9,000 jobs after averaging gains of 10,000 for several months. A lot of that had to do with the post office; the other sectors of government seemed soft, too. As we mentioned, retail was unusually weak, jettisoning 3,000 jobs. However, that also followed a relatively strong March. Problems at Sports Authority and ongoing weather effects at clothing stores seemed to be a meaningful part of the problem, too. An early Easter (March) may have hurt the retail employment number for April, too.
Auto Sales Back to Normal
After a scary-looking sales number for March, April sales came bounding back. After average units of 17.4 million units in 2014, sales in March had dropped to a pathetic 16.5 million units, but recovered to a more respectable 17.3 million units in April. That was also well above the 16.7 million units of a year ago. Seasonal and day counts continue to be an issue, but we aren't expecting a lot of growth from the auto sector this year, and even less than last year as the long recovery nears completion. However, we don't expect it to continue to tear holes in the consumption and business investment accounts, as it did in the first quarter.
Also, as April was nearly as good as the best month of the first quarter, it is quite possible that we will see a decent bounce in the second-quarter GDP growth from the auto sector. We also believe that the really strong 18 million-plus units sold in a few months of last fall are a statistical illusion, or at least an unsustainable pop that came out of nowhere.
Nevertheless, we were glad to see that vehicle sales came out of their funk. Autos are a key indicator of consumer sentiment that we can measure in real time. The low March number even had us a bit concerned that just maybe the consumer was truly spooked.
Purchasing Manager Data Suggest Manufacturing Stuck in Neutral
The purchasing data for manufacturers was mildly worse in the U.S. and China, and not much changed in Europe in the month of April. All of the readings are now so close to 50 and relatively trendless that it's hard to draw any strong conclusions. They would seem to suggest that manufacturing is stuck in neutral. Given the ongoing slump in the commodity sector, neutral is just fine with us. We aren't terrible concerned about the weakening U.S. trend. The Markit data has been too optimistic on U.S. manufacturing and now appears to be normalizing. The Markit reading is now about the same as the ISM reading, and at least both readings are above 50.
Import Export Data Show Improving Exports and Surprisingly Low Imports
The import export data in aggregate is a bit surprising, and perhaps not sustainable. U.S. exports are continuing to decline on a year-over-year, averaged basis, but at an ever-decreasing rate. Imports, on the other hand, haven't managed to find a bottom, as shown below.
The picture is similar even if we toss oil out of the equation. While the port strike of a year ago is distorting some of the data, it seems that trade will not be the big drag in 2016 that many feared. Still, the numbers have the scent of being too good to be true. The numbers above reflect three-month moving averages.
The sequential one-month drop in imports was breathtaking, falling by over $7 billion or 4% in a single, sequential month. Well over half the drop was in consumer goods. Here, a common theme is developing. Sporting goods, apparel, and footwear were the major import problem, just as they were in the employment report noted above and last week's consumption report. Clearly weather issues and issues at Sports Authority are having an outsize effect on the data in the short run. It could take a few months, but those trends should start to reverse themselves as markets readjust to a world with a different Sports Authority and more normal weather. Cell phones were not the issue, at least in April. Cell phone imports grew modestly.
Retail Sales Will Be the Big News Next Week, Along With Budget Deficit and Job Openings
Retail sales and consumption have been in a funk for most of 2016, partially related to the weather issues (along with price deflation on the retail sales report) and poor auto sales. Next week's retail sales report will give us some hints of things getting better and whether the first-quarter data was a fluke. However, without inflation data, the report might not paint a completely accurate picture. At least we can rest assured that the auto section of the report will look stunning and higher gas prices will help the headline number, too. However, the Sports Authority issues might still hit this data set. The consensus is that retail sales will jump at least 1%, and still manage to grow 0.6% when the auto sector is excluded.
We expect the federal budget news next week won't be good. While a lot of tax collection categories showed a nice gain in April, taxes on capital gains performed poorly based on daily Treasury reports. We suspect we will be revising our full-year budget deficit amounts higher.
The job openings report should give us a few hints about whether the slowing April jobs report was due to few openings or few workers. We surmise that openings may slump a little.