US Labor Market Slowed in April

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Manufacturing News, Source : The Manufacturer US
Published : 07 May 2007 12:21

by Nigel Gault, Global Insight
The employment situation cooled in April. The job report showed slower hiring, a higher unemployment rate, and a slower increase in wages. The report looks more in tune with the slowdown in economic growth, but is not weak enough to alter the Fed's "wait-and-see" stance.

The resilience of the labor market in the face of weak GDP growth has been a puzzle, and today's employment report gives a hint that the labor market may be coming off the boil. Job creation was at its weakest in 29 months, extending a gradual slowdown already evident. Over the first four months of 2007, job creation has averaged 129,000, down from 189,000 per month in 2006.

In the details, April showed continuing job losses in manufacturing (down 19,000, after an 18,000 drop in March); the losses were widespread. Construction shed 11,000 jobs, following a good-weather-related bounce of 50,000 in March. Surprisingly, the construction losses were slightly heavier in nonresidential construction (which is doing well) than in residential construction (where activity is plunging). The mild decline in residential construction employment during the housing downturn remains a puzzle, with time lags and the widespread use of illegal aliens not picked up in the payroll survey being the most likely explanations.

Service-producing employment rose 116,000 in April, weaker than March's 141,000 gain. Healthcare (up 37,000) led the way, as usual. Professional and technical services added 33,000 jobs, up from 13,000 in March—a good sign, since these tend to be higher-paying jobs. Food service and drinking places added 25,000 jobs, an encouraging sign, given the threat from soaring gasoline prices to discretionary spending on eating out. And the government sector added another 25,000 jobs, concentrated in state and local payrolls.

The big losers in the service sector were retail (down 26,000) and finance (down 11,000). The retail decline reflects a 41,000 loss in general merchandise stores, which more than reversed a 30,000 increase in March. This swing may reflect difficulties in accounting for the shifting timing of the Easter holiday. The financial job losses probably have a more fundamental explanation, with 14,000 jobs lost in "credit intermediation," which likely reflects the fallout from the woes in subprime mortgage lending.

The unemployment rate edged up to 4.5%, from 4.4% in March. But it remains smack in the middle of a narrow band between 4.4% and 4.6% where it has fluctuated since last September. Household employment plummeted by 468,000, but the labor force plunged by 392,000, so the change in the jobless rate was small. Month-to-month changes in household employment and the labor force can be volatile (household employment rose 335,000 in March), making interpretation difficult.

Average hourly earnings growth was 0.2%, down from 0.3% in March. The year-over-year growth rate fell to 3.7%, from 4.0%, further below its December 2006 peak of 4.3%. Wage inflation remains a concern for the Federal Reserve, but at least the earnings data are hinting that it has peaked.

Total hours worked fell 0.4% in April, reversing half of the 0.8% surge in March. The second quarter remains on track for an increase in hours worked similar to the 1.1% annualized gain in the first quarter.

Our expectation is that growth in the economy will remain subpar (about 2% for both the second quarter and 2007 overall), and that the coming months will see the unemployment rate edging up further, which would open the door for an interest rate cut sometime in the third quarter.

But the Fed will need more evidence before acting, and it is far from certain that it will be able to cut rates. Some slowdown in the labor market was needed just to forestall the need for additional rate hikes. To make a case for a rate cut, the Fed will need to see further slowing over the next few months (as of now, the unemployment rate remains very low), along with a softening of consumer core price inflation. At next week's FOMC meeting, it will stick with its "wait-and-see" stance and likely reiterate its worries over inflation.

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