Pundits are wringing their hands about the poor jobs report, with +266K of new jobs in April compared to 1M estimated. Non-farm jobs recovered to 144.3 million in April, compared to 152.5m in Feb 2020, a shortfall of 5.4%.
Hours worked has done slightly better, at 5.05 billion in April, compared to 5.25bn in Feb 2020, a shortfall of 3.8%.
The rate of increase (in hours worked) slowed significantly from March 2021, but that is to be expected. It will be difficult to match the recovery rates achieved at the re-opening and we suspect that the +1m new jobs estimate for April was over-optimistic.
Manufacturing jobs are not fully recovered either, at 12.3m in April, a 4.0% shortfall from the 12.8m in Feb 2020. But manufacturing production in March 2021 (104.3) was only 1.7% below its Feb 2020 reading and is expected to close the gap even further in April. A sign that productivity is improving.
Average hourly wage rates continue to grow between 2.5% and 3.5% (YoY). A sign that employers are able to fill job openings.
Outside of manufacturing, job openings are growing. A sign that wage rates are likely to follow.
We suspect that job openings are concentrated in low paid jobs where the pandemic and higher unemployment benefits are likely to have the most impact on participation rates.
After momentary panic, the bond market seems to have decided that the weak jobs report is a non-event and unlikely to reduce inflation or require increased Fed intervention. The 10-year Treasury yield dropped to 1.525% in the morning but recovered to 1.572% by the close.
The labor participation rate has been declining for 20 years and the COVID-19 pandemic may have accelerated the decline. Participation rates may never fully recover to pre-pandemic levels.
But as long as the difference is made up by rising productivity (output/jobs), boosted by increased automation, then the economy is expected to make a full recovery.
Higher unemployment benefits and a lower participation rate are likely to drive up wages for unskilled jobs, while de-coupling from China and on-shoring of critical supply chains is expected to lead to skills shortages, driving up wages for higher-paid employees. The Fed will be reluctant to increase interest rates to cool the economic recovery, allowing inflation to rise.
When the (inflation) train starts to roll, it is difficult to stop. Sharp pressure on the (interest rate) brake is then required, but would cause havoc in bond and equity markets.