What it means for the US financial outlook

Server Nioka Mantilla is arranging buffets at the DoubleTree by Hilton Hotel on Penn Street in Reading, Pennsylvania on Friday morning May 7, 2021.

Ben Hasty | MediaNews Group | Read Eagle via Getty Images

The amazingly disappointing April job report shouldn’t be viewed as an indictment of the rapidly developing economic recovery, but shouldn’t be dismissed as a mere month-long slip, according to Wall Street economists and market experts.

A confluence of factors helped explain the Labor Department’s weak number, which showed the number of non-farm workers had increased by just 266,000 in what forecasters had expected to be 1 million.

These include: low labor supply due to a skilled labor shortage, reluctance of some due to Covid-related fears and the continuation of improved unemployment benefits, and seasonal factors that distorted job creation expectations.

“The main thing we learned from this reopening was that we thought it was going to be this smooth trend of all of these good things. What we’re starting to realize is that it is likely to get a little bumpy,” said Jim Caron, head of the global macro strategies for the Global Fixed Income team at Morgan Stanley Investment Management.

“The road is still pointing in the right direction. It will just be a little less slick than we thought,” he added.

Some positive signs in the midst of weakness

Despite the huge failure, there were still things to like in the report that pointed to strong fundamentals for the job market, even if the headline number was a huge disappointment.

For one thing, the unemployment rate rose 0.1 point to 6.1%, but that was largely because more Americans were back in work, a key metric for policymakers.

The level of remote working also fell from 21% in March to 18.3% of employees. Those who said they didn’t work because their employer closed or lost business for pandemic-related reasons fell from 11.4 million to 9.4 million. Those unable to find work due to the pandemic fell from 3.7 million in the previous month to 2.8 million. The average length of unemployment decreased from 29.7 weeks to 28.8 weeks.

There is hope for the future too: economic growth is expected to pick up even more in the second quarter, and other real-time indicators such as restaurant reservations, pedestrian traffic and employment costs point to further employment gains.

“This is just a minor bug. It’s a data point. I wouldn’t take much of it,” said JJ Kinahan, chief marketing strategist at TD Ameritrade. “This is one of those reports that is kind of interesting, but that makes the next report even more interesting because there is something strange about it.”

Indeed, the financial markets were not disappointed at all.

Shares rallied during the day and shorter-dated government bond yields fell, an indication that inflationary pressures were easing, at least for a short period of time.

The market reaction has been a bit of a mystery, particularly the movements in the bond market, although the overall feeling was that any urgency the Federal Reserve felt to contain economic growth would be further dampened by the employment situation.

“Time to take a deep breath. One month’s data doesn’t prove anything; payrolls could recover massively in May,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics. “But if the April report suggests it [a] Trend that will continue then the rally in government bonds makes no sense on these data as the result will be much faster wage growth and the possible embedding of the impending reopening of margins. “

Many questions

Wages accelerated during the month, up 0.7% from March, although they were unchanged from a year earlier. The gains could be due to added pressure on companies to pay more to encourage workers to return to work.

The combination of higher wages and a slight decrease in hours worked “suggests that labor shortages are becoming more apparent, which in turn may be a factor stifling employment growth,” said Michael Pearce, senior US economist at Capital Economics, in a note.

“Overall, it is difficult to gauge how much weight this report deserves at a time when most of the other evidence is suggesting that economic activity is recovering rapidly, but it is a clear reminder that the labor market is recovering consumption is lagging behind the recovery, “he added. “This is a crucial distinction for the Fed.”

David Berson, chief economist at Nationwide Mutual, said April numbers raise the question of whether this relatively weak employment report is a sign of weaker demand or a sign of lack of supply. This question is about whether or not the unemployment benefit, which is $ 300 above what recipients would normally get, is too high. He also wondered if there was a skills mismatch, if it was a question of not yet reopening schools, or if business startups were lagging behind.

“All of this probably plays a role,” he wrote.

Krishna Guha, head of central bank strategy at Evercore ISI, said the report “only diminished belief that a very strong acceleration is already underway” and described it as “more supply-side stagflation than Goldilocks”.

Stagflation is a term used to describe an economy like the 1970s, where growth is low and inflation is high.

But White House officials on Friday broadly took the report as an indication that more needs to be done, not less, to bring the economy back to full power.

President Joe Biden said the numbers were “on track” but “we still have a long way to go,” while Treasury Secretary Janet Yellen said the report shows there will be some bumps along the way.

Wall Street generally agreed, claiming that the high levels of stimulus coupled with continued advances against the coronavirus will drive further attitudes.

“My inclination is not to read too much into weakness,” wrote Eric Winograd, Senior Economist at AllianceBernstein. “I remain confident that the economy is accelerating and will continue to accelerate, and that the labor market will reap the benefits of this expansion sooner rather than later.”

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