U.S. employers added 211,00 jobs in April—well above the consensus forecast of 185,000. February’s number was revised upward, and March’s total downward, for a net change of 6,000 fewer jobs. Wages grew by 7 cents per hour in April and the trailing 12-month increase slowed slightly for a second consecutive month, to 2.5%. The unemployment rate fell to 4.4% and the labor force participation rate dropped slightly, to 62.9%.
After a lull in March, April saw employment growth rebound. The rolling three-month average was virtually unchanged at 174,000 jobs per month and the average for the past 12 months is 186,000—so employers have not materially changed their hiring patterns. Notwithstanding the change in business and consumer sentiment since Donald Trump’s election, economic data in 2017 remain very similar to those at the end of the Obama administration.
Fed Watch: The Fed met earlier this week and did not change its interest rate policy. This non-action was expected. Along with most other analysts, we believe the Fed is still on track to raise rates two more times this year. We continue to closely monitor the Fed’s statements regarding balance sheet reinvestment. This is likely to start in late 2017 or early 2018 and will have a much greater impact on the longer end of the yield curve. The 10-year Treasury rose slightly to 2.35% immediately following the jobs report, but it remains well below the 2.65% yield from earlier in the year.
Labor Force Participation: The labor force participation rate dropped slightly—to 62.9% from 63.0%. The monthly number can be volatile, but has remained between 62.4% and 63.0% since August 2013. This stability is encouraging, given that the aging of the workforce is working against the participation rate. The employment-to-population ratio of prime-age workers increased to 78.5%.
Wage Inflation: Wages grew by 7 cents last month, but the annual rate of growth dipped from 2.7% to 2.5%. Wage growth has modestly decelerated in the past few months, but with such a low unemployment rate and with labor shortages in certain sectors, it should start to pick up. The number of job openings is high, and many employers are having difficulty finding qualified workers. We have been stating this for more than six months, and wage growth still hasn’t accelerated past 3%. We continue to monitor this, having been overly optimistic regarding wage growth to date.
Job Growth Outlook: The continued decline in the unemployment rate and solid average job growth mean the economy is doing well. Job growth is unlikely to maintain its current pace without significant increases in the participation rate, which ticked down in April. We continue to expect job growth to slow—to 150,000 per month from its previous 12-month average—over the remainder of the year, due to tight labor market conditions.
Retail: Retailers added roughly 6,000 jobs in April after shedding 30,000 jobs in March. The performance had been particularly bad for general merchandise stores, but they rebounded this past month, adding 7,500 jobs. Department stores have shed more than 90,000 jobs since October 2016.
Office: Financial activities continued their good run with another 19,000 jobs added in April, while professional & business services added 39,000 jobs. Those two sectors have added 800,000 jobs over the past 12 months. Healthcare was also up by 37,000 jobs in April. This bodes well for office absorption in the near-term, even if hiring slows.
Construction: Construction payrolls grew by 5,000 as the housing market continues to expand. Some specialty construction jobs continue to face significant labor shortages, so a continued decline in job growth for this sector would not be surprising. Rising wages may draw more workers in, but acquiring the necessary skills for certain trades takes time and will not be relieved in the short-run.
Oil: After rising in March, the price of oil has fallen below $50 per barrel as the shale revolution continues. Mining jobs are up for the year and oil & gas has added more than 1 million jobs so far. The drop in oil prices will slow the inflationary growth that had started to build. Inflation is close to the Fed’s 2% target; the flattening of oil prices should help keep it there.
Healthcare: The House, on a pure party-line vote, passed a repeal-and-replace of Obamacare yesterday. This bill now heads to the Senate, where its fate is a lot less certain. Even if the Senate does pass a change in healthcare, it is likely to be very different than the House version. This uncertainty may start to impact the health sector later this year, which could lead to slowing job growth for life sciences and/or less absorption for medical office.
Autos: Autos have been a major driver for both the production and the consumption sides of the economy during this expansion, but much of the pent-up demand for autos has been fulfilled. We are already seeing a surplus of mid-sized and compact vehicles on dealer lots, despite record-level incentives. Additionally, a glut of used vehicles is hitting the market, as 2017 will be a record year for lease returns. Sub-prime credit has also started to deteriorate, leading to less lending and fewer sales. Look for longer plant closures this summer when model years change, as well as less overtime, which will lower disposable income.