Macro Focus — April’s Confusing Jobs Report

Fri, MAY 2nd, 2014

Extra! Extra! Read all about it! April jobs report crushes forecasts!

Indeed, on the report’s surface the data was stellar: 288K jobs added in April; upward revisions for both February and March; and the unemployment rate dropped to 6.3% from 6.7%, the lowest print in about 5 ½ years. Job gains were recorded across every sector. But like a shiny used car that conceals a clunky motor, a check under hood is warranted.

I won’t downplay the 288K jobs figure. Anytime folks find work this is worth celebrating. And this economy is adding jobs, don’t let anyone tell you different. In fact, with this number we have now virtually recouped all of the jobs this country lost during the Great Recession [see first chart courtesy of Calculated Risk]. Admittedly, this took much longer than in prior recoveries, but we also started in a much deeper hole and have battled greater macro challenges along the way. But that’s a topic for another confab.

Let us return to kicking the tires on today’s release. A deeper examination displays a few soft spots.

First and most critical, after gains in each of the three prior months April’s household survey – from which the official U3 unemployment rate is computed – experienced a loss of 806K people from the labor force. This is huge. As a consequence the participation rate fell to 62.8%, the lowest since 1978 [see second chart, from Reuters]. Had the labor force remained unchanged the jobless rate would have ticked up to 6.8%. It is unclear exactly why this mass exodus occurred. Some of it is certainly a continuation of ongoing secular drivers – longer-run social and demographic trends. These are structural issues, which policy can only marginally impact. On the cyclical side, this big dip in April could be explained by those long-term unemployed who lost their benefits when Congress failed to extend them earlier this year. Having only now become totally discouraged in their search for jobs, and without benefits as a motivator, they have given up. Indeed, the data is both clear and unjust – longer-term unemployed have a much harder time finding work.

The BLS offers a different explanation pinning the decline as “mostly due to fewer people entering the labor force than usual” as opposed to more people actually leaving. Perhaps. The labor economy is at its core a revolving door. People are always entering and leaving, but in order to have a stable inflow more need to be going in than coming out.

Of course it is equally possible that none of these fully explain this decline. It could be something more sinister; a reflection of a labor market that is significantly weaker than headline numbers suggest. Only time will tell.

Another area of lassitude in the report was average hourly earnings — dead flat month-over-month at $24.31. This is in-line with the sluggish wage growth we’ve seen so far in the five-year old recovery. Rising wages are important in keeping aggregate consumption going and thus the economy moving forward. One plausible theory here is that this pause simply echoes the true spot where adverse weather caused a “snap back” in the labor economy. To wit, hourly wages increased markedly during the winter months as hours worked declined [due to weather] without a corresponding drop in wage rates. If we are reverting back to a slower mean then incomes are not improving by the magnitude that the last few jobs reports would indicate.

On net, today’s jobs release was a curious one. Financial markets aren’t exactly sure what to make of it with stocks bouncing around the unchanged line so far in today’s session. Was this report good enough to suggest that the economy is accelerating? And if so, is this good for stocks? Should be, right? But wait, perhaps it’s bad because that may mean the Yellen Fed will move up the timing of monetary tightening? No wait … on the other hand, maybe this report is not so good? Perhaps it’s indicative of a softer economy? If so, is this good for stocks as it buys the Fed some additional latitude to keep their foot on the monetary throttle? Though … if it’s bad for the economy how can it be good for stocks?

The market is confused. And, to some degree, so is everyone else.

Jason L. Ware, MBA
Market Strategist, Chief Analyst
Albion Financial Group
(801) 487-3700; (877) 487-6200
jware@albionfinancial.com

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About Albion Financial

Established in 1982, Albion Financial Group is an independent, fee-only financial planner and investment manager located in Salt Lake City, Utah.