U.S. private payrolls post biggest gain in seven months as labor market recovery gains steam

By Lucia Mutikani

WASHINGTON (Reuters) - U.S. private payrolls surged by the most in seven months in April as companies rushed to boost production amid a surge in demand, suggesting the economy gained further momentum early in the second quarter, powered by massive government aid and rising COVID-19 vaccinations.

Strengthening labor market conditions were reinforced by other data on Wednesday showing a measure of services industry employment increased last month by the most in more than 2-1/2 years. The reports bolstered expectations for another month of blockbuster employment growth in April.

"The job market is picking up steam in the spring as consumers are more comfortable going out given vaccinations and stimulus checks," said Gus Faucher, chief economist at PNC Financial in Pittsburgh, Pennsylvania.

Private payrolls rose by 742,000 jobs last month, the largest gain since last September, the ADP National Employment Report showed. Companies hired 565,000 workers in March. Economists polled by Reuters had forecast private payrolls would increase by 800,000 jobs in April.

The acceleration in hiring was across the board, with the leisure and hospitality sector adding 237,000 jobs. Manufacturers hired 55,000 workers and payrolls in the construction sector increased by 41,000 jobs.

The ADP report is jointly developed with Moody's Analytics. It, however, likely understates the pace of job growth.

Since the recovery from the pandemic started, ADP has underestimated the private payrolls count in the government's more comprehensive, and closely watched, employment report because of methodology differences.

"The April ADP report is consistent with accelerating job growth, especially because the ADP panel methodology likely undercounts workers returning to their previous employers," economists at Goldman Sachs wrote in a note. "We continue to expect larger gains in the official payroll measure."

Stocks on Wall Street were trading higher. The dollar was steady against a basket of currencies. U.S. Treasury prices were mostly lower.

For a graphic on ADP:

https://graphics.reuters.com/USA-STOCKS/xegpbdkkqpq/adp.png

WORKERS SHORTAGES

In a separate report on Wednesday, the Institute for Supply Management (ISM) said its measure of services industry employment increased to a reading of 58.8 last month, the highest since September 2018, from 57.2 in March.

The ISM survey suggested that hiring could have been even stronger if not for worker shortages. According to the ISM, businesses in the accommodation and food services industries reported "competition for labor as more restaurants begin easing their restrictions and returning to normal levels."

In construction, companies complained that "finding and retaining labor, skilled and unskilled, is highly challenging and frustrating," and that "as the challenges continue, we are not accepting all the work that we could if we had the labor."

Tight labor supply and shortages of inputs led to overall activity in the services industry growing at a slightly slower pace in April. The pandemic has shifted demand towards goods, leading to a shortage of raw materials.

For a graphic on ISM PMI:

https://graphics.reuters.com/USA-STOCKS/rlgvdywwxpo/ism.png

The labor market has improved significantly, with new claims for unemployment benefits dropping to the lowest level since March 2020 when mandatory shutdowns of nonessential businesses were enforced to slow the first wave of COVID-19 infections.

Consumers' perceptions of the labor market are the strongest in 13 months. According to a Reuters survey of economists, nonfarm payrolls likely increased by 978,000 jobs last month after rising by 916,000 in March. The Labor Department will publish April's employment report on Friday. But the scarcity of workers across industries could restrain hiring.

"The biggest downside risk to Friday's jobs report is the difficulty employers are having finding workers," said Tim Quinlan, a senior economist at Wells Fargo in Charlotte, North Carolina.

The broadening economic re-engagement is unleashing pent-up demand, which is expected to keep consumer spending robust, after it accelerated sharply in the first quarter. The economy grew at a 6.4% annualized rate last quarter following a 4.3% pace of expansion in the fourth quarter.

The government has provided nearly $6 trillion in pandemic relief over the past year. Americans over the age of 16 are now eligible to receive the COVID-19 vaccine. Many states, including New York, New Jersey and Connecticut, are lifting most of their coronavirus capacity restrictions on businesses.

Most economists expect double-digit GDP growth this quarter, which would position the economy to achieve growth of at least 7% this year. That would be the fastest since 1984. The economy contracted 3.5% in 2020, its worst performance in 74 years.

"As states increasingly ease mitigation protocols and the U.S. flirts with herd immunity this summer, consumer spending will become less skewed in favor of goods consumption, which will help alleviate shortages of materials," said Bernard Yaros, an economist at Moody's Analytics in West Chester, Pennsylvania.

"Further vaccine progress will reduce fears of contracting and spreading COVID-19, which is holding back some 4 million adults from re-joining the workforce."

(Reporting by Lucia Mutikani; Editing by Chizu Nomiyama, Paul Simao and Andrea Ricci)