Sunday, May 8, 2011

US April Jobs Better Than Expected

Non-farm payrolls rose 244k in April. The consensus expecation was for a rise of 185k, but after a string of weakish data (non-manufacturing ISM, initial jobless claim), the market had been bracing itself for something lower than that. The printed result was therefore somewhat of a relief. There was also a continuation of the trend of upward revisions to prior month data.

Even better, private payrolls were up 268k. That's the biggest monthly gain in 5 years. Yep, that's what I said - 5 years! Furthermore, the growth was broad-based. Our favourite sector, manufacturing, saw 29k jobs added in the month. Retail was up 57k, professional and business services 51k and education and health 49k.

Public sector employment continued to shrink, with jobs in that sector down 24k. This is currently largely being driven by budget cuts at the State and local level. Expect this trend to continue, especially as planned Federal budget cuts start to impact.

There was also a non-subtle reminder of the still huge task ahead in the labour market with the unemployment rate rising back to 9%.

The unemployment rate is calculated from the household survey which has been showing stronger employment growth than the payrolls data. We have attributed much of that divergence to the structural nature of the recession and the challenge for the payrolls data of keeping up with dynamic change in the labour market, especially as old firms close and new ones open up. This month, some of that gap closed with a fall in the household survey employment numbers, leading to the rise in the unemployment rate.

Given the weakness in recent initial claims data, we wouldnt be surprised to still see a weak monthly payrolls out-turn in the next month our two. On a more medium-term basis, one factor that bodes well for future jobs growth in the US is the recent slowdown in productivity growth. Non-farm productivity rose at a reasonably healthy seasonally adjusted annual rate of 1.6% in Q1, but is up only 1.3% over the year to March 2011. That is well down on the 6.7% recorded for the previous March year.

Our read on what is happening here is that during the recession and the early stages of the recovery, firms were cutting costs by cutting labour and finding better more efficient ways of doing things. That means over that period, jobs fell faster than output, so output per worker (productivity) rose. Perhaps now firms are finding it difficult to drive more efficiencies out of their existing people, and are now moving to the next phase of hiring new people to meet the albeit gradual improvement in economic activity.

That does not mean that employees are back in the driving seat when it comes to wage demands. The unemployment rate is, after all, still at 9.0%. But as with New Zealand (see post below), the labour market is one of the areas we would expect capacity constraints to show up first, especially in demand for skilled labour.

In our view, wage data will be critical in helping the Fed work out when they need to start the "monetary policy normalisation" process. Indeed unit labour costs are already ticking up, but at still low levels (1.2% for the year to March 2011) are not an immediate threat to the Fed.