INDICATOR: April Employment Report
KEY DATA: Payrolls: +288,000; Private: +273,000; Unemployment Rate: 6.3% (down 0.4 percentage point)
IN A NUTSHELL: "It is clear that firms are hiring again but we still need wages to rise faster if the economy is to really accelerate."
WHAT IT MEANS: Wow! That is the best way to describe the April employment report. Payrolls surged and the gains were across the entire economy. Yes, there was lots of hiring in the more traditional low paying areas such as retail, restaurants and temporary positions, but those gains were generally not out of the normal. At the same time we had solid increases in construction, manufacturing, wholesaling, professional and technical services, health care and education, all good paying industries. That we cannot argue the we are only adding low paying jobs is another indicator that the economy is improving across the board. And local governments are back in the hiring business, especially for teachers. That is good for my son who is looking for a full-time music teacher position. Anyone got one? If there was an issue with the report, it was with the household data, which is where we get the unemployment numbers. It was great to see the rate decline from 6.7% to 6.3%, the lowest rate since October 2008. But the large drop is not consistent with conditions. There was a huge decline in the labor force, the second time in seven months the change was outsized. The October 2013 drop (which was even bigger) was followed by an almost equally large rise in November and I suspect that will be repeated this time around. That implies we could see a rebound in the unemployment rate. I had expected the rate to possibly hit 6.5% and I am guessing that is where it could be in May. This is important because average hourly wages and earnings went nowhere. There may be fewer workers available but firms don't feel they have to pay more, even if there are growing complaints about the inability to find qualified workers.
MARKETS AND FED POLICY IMPLICATIONS: This was a really good report even with the labor force falling and wages constant. The issue is labor market tightness and the growing appetite for workers will create conditions where firms will have to start bidding for employees. Right now, there is the belief, created by seven years of excess labor, that it is not necessary to pay up for new workers. But the unemployment rate is coming down and it looks like by the end of the year, my expectation of a below-6% rate will be met. Firms can continue to complain about the lack of qualified workers or they can start raising wages and attract those workers. Right now, the business community is in a massive state of denial. By the fall, that could change dramatically and the winners in the coming worker retention battle are likely to be those who bite the bullet sooner rather than later. Janet Yellen has to be a bit concerned about the falling unemployment rate. Even if the labor force rises in May, the unemployment rate may not increase much. Since January 2011, the unemployment rate has ticked up only four times and only by 0.1 percentage point. The downward trend is real and it is only a matter of time before labor shortages are widespread enough that wages gains will accelerate. When that missing piece of the recovery puzzle drops into place, the economy will soar.