The April employment report showed that the US economy added 288,000 jobs in April and the unemployment rate dropped to 6.3%. We saw a big improvement in the labor market for the month, as the data substantially beat expectations both in terms of non-farm payrolls and the unemployment rate—which is now at its lowest level since 2008. This significant improvement in just one month may cause some investors to call into question whether the economy still needs such highly accommodative monetary policy.
Spike in job growth reveals weather-related winter slowdown.
Despite weak GDP growth in the first quarter, we saw a substantial jump in job growth in April, and the gains were spread across a broad array of sectors, suggesting resilience in the labor-market recovery. This jobs report seems to support our view that the harsh winter depressed economic activity, but created a coiled spring when the weather warmed up.
Unemployment dipped below the Fed’s former target.
The unemployment rate blew through the Fed’s 6.5% threshold, the point at which, up until a few months ago, the Fed had signaled it would likely begin raising the fed funds rate. It’s a good thing the Fed not only moved the goalposts but replaced them altogether. Otherwise, the stock market would have a much more negative reaction to this report.
There are significant flaws in the jobs report.
While the percentage of long-term unemployed (people out of work 27 weeks and more) fell to 35.3% from 35.8% of total unemployed, it’s still far higher than normal long-term unemployment rates, which comprise roughly 20% of total jobless. The labor force participation rate dropped as well and some of the decrease could be due to unemployed people who have seen their benefits expire. In addition, average weekly hours and average hourly earnings were both flat, while the annual earnings growth rate fell to 1.9% from 2.1%.
We may not see meaningful wage growth for a while.
The low increase in average hourly earnings and the drop in the earnings growth rate suggest that we won’t see significant wage inflation in the near term. However, expect pockets of wage inflation in specific areas of the economy where jobs are in demand such as technology, a trend that has already been observed in some regions, according to the Fed’s Beige Book.
What It Means for Investors
This jobs report, while positive, is unlikely to alter the course of monetary policy, which remains highly accommodative. This report, however, confirms our view that we’re in a gradually recovering labor market and that the economic recovery is flawed but improving. Today’s numbers hint at what’s likely to come—and what we expect to come—but we need to see more of the same progress before the Fed considers tightening.
In other words, we remain in an environment of financial repression, which has reshaped the investing landscape. Investors need to ensure that they’re not overexposed to asset classes that have been rendered less attractive from a risk/reward perspective, namely cash and core fixed income. And investors need to ensure that they have adequate exposure to risk asset classes—such as high-yield bonds, convertible bonds and stocks—in order to meet their long-term goals.