Perhaps the most appropriate reaction to the miserable jobs report Friday was “Oh,” tweeted by Pantheon economist Ian Shepherdson.
As the U.S. economy has shown signs of ramping up, consensus expectations for the April jobs numbers were high. But instead of the 1,000,000 new payrolls expected, only 266,000 new jobs were posted. A whopping miss. Now, the unemployment rate is 6.1% instead of the expected 6.0%, and last month’s jobs numbers were revised downwards as well, to 770,000 from 916,000.
Though the S&P 500 index was up when the market opened Friday, an hour following the news, economists and labor market observers parsed the release.
"This might be one of the most disappointing jobs reports of all time,” wrote Indeed’s economic research director Nick Bunker. “Every month job gains don’t accelerate puts us further behind.”
The U.S. has 8.2 million fewer jobs than before the pandemic; and that figure doesn’t even take into account all the job growth we would have had had the coronavirus been held at bay.
“At least job gains picked up in the leisure and hospitality sector, where job growth is desperately needed,” Bunker added. Leisure and hospitality added 331,000 jobs, after having added 413,000 in February and 206,000 in March.
“But the gains were not as fast as hoped for or, frankly, as needed. Employment in these industries is still almost 17% below pre-pandemic levels.”
Labor demand isn’t the problem
The interesting thing for this jobs report is that demand for labor isn’t the problem, Pantheon’s Shepherdson wrote in a note following the release.
In fact: “We know from endless surveys that labor demand is very strong, but we also know from both surveys and media-reported anecdotes that firms are finding it hard to recruit people, despite a 6.1% unemployment rate,” Shepherdson wrote. NFIB’s jobs report for April shows 44% of all small-business owners report having job openings they couldn’t fill, 22 points higher than the 48-year historical average, and two points higher than the 42% figure from March.
Amid these surveys has been a realization that firms will have to pay a little more for labor to fill these jobs, and Shepherdson said Friday’s data “just made it much easier to argue that the re-upping of enhanced unemployment benefits by $300/week in the March relief bill has crimped labor supply.” (The U.S. Chamber of Commerce on Friday called on Congress to cancel the extra $300 in weekly unemployment benefits, citing worker shortages.)
In other words, it appears at least some workers are holding out for better wages. And as labor demand rises as more businesses reopen, this squeeze will continue. This may set up a big political struggle between businesses wanting to cut unemployment programs and people who have relied on them for their survival during the pandemic.
“If people continue to resist taking the jobs on offer at the pay on offer, then wages will have to rise more quickly,” Shepherdson wrote. “The 0.7% jump in April average hourly earnings is startling, especially with the low-paid hospitality sector accounting for all the net new jobs; this should have pushed average hourly earnings down.”
Just one month
The big miss in estimates, according to Pantheon, stemmed from analysts relying too much on ADP data and assuming a certain momentum. Other hiring and employee management platforms, like Homebase, hinted at the real April activity. Still, Shepherdson and Bunker are circumspect.
“Time for a deep breath. One month’s data prove nothing; payrolls could rebound massively in May,” Shepherdson wrote. “But if the April report is indicative of a trend which will persist, then the rally in Treasuries after these data makes no sense, because the outcome will be substantially faster wage growth and the potential embedding of the impending reopening spike in margins.”
Markets also misunderstand the April numbers, Shepherdson said, as they see the jobs numbers as evidence of low labor demand, whereas survey after survey shows that businesses want to hire.
With a jobs month so counter to the narrative, it will take yet another month to get a good picture about the economy and certainly its “overheating” status. As Bank of America wrote in a note, this news should keep the Fed comfortable for a little while.
Still, big things are expected. Indeed, Pantheon and others see big booms coming around the corner.
"As poor as today's jobs growth was relative to what was expected, we still believe the reopening is coming and future months should make up for this miss,” wrote LPL Financial's chief market strategist Ryan Detrick.
And while there is disappointment in the headline numbers, there were some improvements, like the prime-age employment to population ratio and overall labor force participation, Indeed’s Bunker points out. With these numbers still far below the February 2020 levels, there’s plenty of room for gains.