- The labour market has proven mostly resilient. April’s nonfarm payrolls rebounded to 223K after a downwardly revised 85K the previous month. The unemployment rate fell to 5.4% from 5.5%.
- This report keeps the Fed on track for a rate hike in September 2015. We do not see faster wage growth as a precondition to Fed tightening, although if this occurred, it would make the FOMC’s decision easier.
Job growth solid, as employers shake off winter effects
The April nonfarm payrolls report was solid, increasing 223K after a downwardly revised 85K the previous month. The labour market cooled a bit in the first quarter, averaging 184K. This was, however, almost in line with the first quarter of 2014, which also suffered a short interruption in job gains during the harsh winter. The return of strong job creation in April suggests that employers are shaking off the winter effects. The unemployment rate fell to 5.4% from 5.5%.
Service-providing employment strong
Looking at the details, professional business services added 62K up from 35K the previous month, closely followed by education and health which added 61K jobs. Construction saw a sharp increase in hiring of 45K compared to the previous month (-9K), this is a sign of improvement in sectors sensitive to winter weather. Meanwhile, a stronger dollar continues to impact manufacturing activity. Job gains in manufacturing related activities remained subdued at 1K after reporting no job growth the previous month.
Wage growth improves in April
Wage growth continued to pick up moderately, but it comes amid other signs that wage growth is picking up. In April, wage growth was up 2.2% from a year earlier, slightly higher than the annual gain of 2.1% in March. On a month-on-month basis wages grew 0.1%, down from 0.2% the previous month. Other measures of wage growth, including the employment cost index released last week, which is a broad measure of wage and benefit expenses rose 0.7% in the first quarter, up from 0.5% in the last quarter of 2014.
Labour market ready for rate hike
The Federal Reserve wants to see strong hiring again as it considers raising short-term interest rates. The Fed looks at a large set of indicators to determine the health of the labour market. Labour demand, measured by US Job Openings is rising at post-recession highs. The ratio of unemployed job seekers to job openings is at its lowest levels since November 2007. Meanwhile, jobless claims have been reporting historical lows. The participation rate, however, is taking more time to reflect strength. The share of Americans looking for work remains weak, but it edged up in April to 62.8% from 62.7%. We think that the labour market is broadly resilient.
This report keeps the Fed on track for a rate hike in September 2015. We do not see a higher participation rate or faster wage growth as a precondition to Fed tightening, although if these indicators improved this would make the FOMC’s decision easier.